The S&P 500 is just five percentage points shy of 100% recovery
The S&P 500 is poised for its fastest 100% recovery in history and investors remain bullish on the US equity market, but advise caution on the sustainability of such a rapid recovery.
From its 20 March 2020 low point to 6 August 2021, the S&P 500 has risen 95% in under 17 months, according to data from FE fundinfo, well ahead of the pace of the current record recovery following the Global Financial Crisis, which took two years.
Tech, travel and stimulus means US equities have outperformed peers
While nothing is guaranteed, Juliet Schooling Latter, research director at Chelsea Financial Services, believes it is "highly likely" the previous record will be broken given the strength of US earnings combined with current monetary policy.
"The difference between this crisis and post-GFC is that we have had faster and bigger amounts of fiscal stimulus which are helping us to recover faster," she explained. "The earnings growth is also extremely strong. People have been calling [it] another tech bubble because they have been focusing on share price charts for tech companies.
"But actually, for the big companies like Apple, Alphabet, Facebook and Microsoft, the growth in earnings is huge and fully justifies the valuations in my opinion, particularly when government bond real yields are negative."
However, Liam Nunn, portfolio manager of Schroder Global Recovery, argued the valuations within the US equity market are at "eye-watering levels" and warned investors should look elsewhere to diversify their global equity exposure.
"The cyclically adjusted price earnings ratio (CAPE) has not yet matched the historical peak at the height of the dotcom boom, but it now stands at over 38x and, in the recorded history of the US stock market, investors have never made a positive ten-year return from that kind of starting valuation point."
Gerrit Smit, manager of Stonehage Fleming Global Best Ideas Equity, added the pace of the recovery is "not too much of a surprise" given that the pandemic-induced recession ended 15 months ago.
"Considering the peak prior to the pandemic, the index is up ‘only' 30%, or 20% on an annualised basis," he said. "This is not totally out of the ordinary."
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Manager of the RWC Global Equity Income fund Nick Clay also argued the pace of the recovery is unsurprising, owing to the relatively unique nature of the current economic trajectory.
"Firstly, the recession experience in 2020 was self-inflicted rather than caused by an overheating of the economy and resultant tightening measures," Clay explained. "This time [unlike 2008], the recession was caused by imposing a shutdown on the global economy. It was as if we simply hit the pause button mid-game."
"Secondly, due to these self-inflicted actions, government stimulus has reached levels not seen since WWII."
‘Unprecedented quantitative easing'
The pace and scale of government stimulus deployed in the immediate wake of lockdowns has been "absolutely critical" to the rapid recovery of the S&P 500, according to Schooling Latter.
"Everyone is desperate for a better return and has been forced up the risk spectrum," she said. "Government bond buyers are now buying investment-grade corporate bonds. Corporate bond buyers are now buying high yield and high yield buyers might now be buying equity.
"The result is a massive wall of relentless cash coming into the equity market."
