HedgeTalk - Are Equity Markets Divorced From Reality?

By: John Trefethen, Director & Co-Founder

The US economy was largely closed for over two months due to concerns with Covid-19. Just as it began to open, cities across the country were impacted by protesting and rioting that was sparked by the senseless murder of George Floyd on May 29, 2020. In spite of these difficult and tragic events, the S&P 500 keeps fighting its way higher from this year’s lows. The benchmark index has climbed nearly 6% in the past two weeks and is now just 8% off its all-time high. It had fallen by as much as 34% as stay-at-home orders were put in place to slow the spread of Covid-19. Below is the S&P 500’s performance for 2020.

In mid-late May, many states were beginning to open-up, which was creating optimism amongst equity traders. As protests rippled across the US, the sentiment amongst many was that equities would suffer. Instead, the stock market has been resilient, implying that market participants don’t see a long-term economic impact from these events. Some have suggested that the resiliency in equities is due to the concentration of economic hardship on the leisure and hospitality sector, whose underperformance has been overshadowed by relative strength in other areas of the market. Below is a summary of decline in payrolls across various industries:

With the government and federal reserve providing record stimulus measures, many believe the recovery will be swift which helps explain the continued upward movement of the S&P 500 and other stock indices. Amid ongoing uncertainties, confidence in the economy appears strong and growing. This bodes well for most in the economy, and will put upward price pressure on many commodities. Commodity price risk managers should be acting now to hedge their exposures. During Berkshire Hathaway’s most recent shareholder meeting early in May, the ever-positive Warren Buffet said “Nothing can basically stop America. The American miracle, the American magic has always prevailed, and it will do so again.” Based on recent movement of US equity indices, who can argue his point?