Friday, August 28, 2020

A Rare Perfect Week


By Matthew Klein |  Friday, August 28
20 for ’20. Today marked the 20th record close of the S&P 500 index so far this year after rising 0.7% on Friday. The index is up almost 9% year-to-date, which would be an impressive performance even if there hadn’t been an unprecedented collapse in income and employment in March and April.
But the S&P 500's run still pales in comparison to the tech-heavy Nasdaq Composite index, which rose 0.6% today to hit its 40th record close for the year. The Nasdaq has been hitting new highs about once every four trading days in 2020. So far this year it’s up more than 30%.
Today’s gains were broad-based, with 376 S&P components up for the day and all 11 sectors green. The biggest winners were in the some of the most beaten-down industries, such as cruise lines and oil refining. Even the beleaguered Russell 2000 index of small-cap stocks was up 0.9%, although it’s still down more than 5% year-to-date. Interest rates, oil, the dollar, and precious metals were all basically unchanged.
Ryan Detrick of LPL Financial noted on Twitter that this is the fifth record close for the S&P this week. The last time the index hit a new high every day for a full week was in October 2017. Before that you have to go back to March 1998. These “perfect weeks” have only happened about a dozen times since the end of WWII. “The S&P 500 was higher for the year every single time,” he wrote.
This may seem nuts, but there is a case to be made that the market remains reasonably priced. After all, earnings have declined relatively little, at least so far, and especially when compared to the drop in economic activity. If that earnings resilience holds up—a big if—it could imply that stocks are attractively priced. Jim Paulsen of the Leuthold Group adjusted the S&P's price-to-earnings ratio by the size of the “output gap” to illustrate this general point and found that this metric implied stocks were trading at valuations comparable to the lows of the early 1980s.
Options traders are comparatively less sanguine. Michael Purves of Tallbacken Capital Advisors analyzed that the gap between the actual volatility of the S&P 500 in August (which was low) and the volatility implied by the prices of puts and calls on the index (which is relatively high). And it's now at one of the highest levels ever recorded. “The VIX premium to 20 day realized volatility is now at 15 points—putting it in the top 0.2% of all readings going back to 2003,” Purves wrote. Things may currently appear calm, but options traders are pricing in the risk of a pullback.
They have good reason to worry: “the average September return is -0.96%, the worst average return for any month,” according to my colleagues at Dow Jones Market Data. Moreover, stocks are more likely to end lower in September (54% of the time since inception) than in any other month, although the past few Septembers have been positive.
Watch our TV show on Fox Business Friday at 10 p.m. or 11:30 p.m. ET; Saturday at 10 a.m. or 11:30 a.m.; or Sunday at 7 a.m., 10 a.m., or 11:30 a.m. This week, see an interview with Richmond Fed President Tom Barkin. Plus, get insights on how to invest in electric vehicle stocks, if you find Tesla’s valuation unattractive.




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