New York stock market shakes by Kim Hyun-seok’s re-proliferation of the Wall Street Now corona

March 23, 2020, a year ago, is the day when the New York stock market plunged in the aftermath of the corona pandemic and hit bottom. During the five weeks from mid-February at that time, the S&P 500 index plunged 34%, with a trough at 2337.40 on March 23, up 76% over the following year.

The important thing will be in the future.

What did the S&P 500 look like the following year, after falling so sharply and rebounding sharply?

According to LPL Financial, there have been five cases (1970, 1974, 1987, 2002, 2009) that rebounded sharply in a bear market of more than 30% after World War II. The average rate of increase for the comeback rally in the first year was 40.6%, but in the second year it fell to 16.9%. In particular, the second year was often accompanied by large adjustments. In 2010, following the 2009 comeback rally, the index rose 15.9% over a year, but at one time fell to 17.1%. This second year’s adjustments averaged 10.2%.

This is similar to broadening the case. Evercore ISI investigated the year that the’V’-shaped bull market appeared from the 1950s, and there were 11 times in total. In 11 cases, the increase in the second year averaged 12.7%. However, the continued rise was also not easy. On average, it has undergone an adjustment of 9.8%.

Bank of America’s Chief Investment Officer Chris Haige said, “The second year after a big rebound is usually a lot of volatility. This year, we’ve already fallen 10% by the Nasdaq 100 index. This volatility has fallen by 10% on the basis of the stock position.” As the replacement continues, we expect it to appear throughout the year. There is already a large-scale rotation under the index. As it moves to value stocks and economically sensitive stocks, the index with a high proportion of growth stocks is under pressure.”

“Overall volatility will continue this year, but we are expecting a positive annual return as the rotation finds a balance and, above all, a rise in corporate profits,” he added.

The first trading of the second year has ended on the 23rd (local time). There was also volatility. Technology stocks that rose the day before have turned to weakness, and economically sensitive stocks, especially travel stocks, have plummeted. Carnival (-7.8%), Norway Cruise (-7.2%), American Airlines (-6.6%), and United Airlines (-6.8%) were sluggish. Caterpillar also fell 3.4% and the apparel gap fell almost 8%.

This is because Europe and other parts of the world are starting to blockade again due to the re-proliferation of the corona or postpone economic normalization plans. The World Health Organization (WHO) announced today that new cases of infection are increasing in most parts of the world as the highly contagious variant of the virus continues to spread. With 2.5 million people getting vaccinated every day in the United States, new infections rose in 21 states as well due to easing the blockade. It also raised concerns that the National Institute of Allergy and Infectious Diseases (NIAID) raised concerns that the clinical trial results of AstraZeneca’s (AZ) corona vaccine may contain out-of-date information.

This concern is best identified in the prices of raw materials such as oil. Western Texas Crude Oil (WTI), which surged the most in anticipation of an economic normalization, fell 6.2% ($3.80) per barrel to $57.76 on the same day. The $60 mark collapsed, pushing it to the lowest price since the 5th of last month.

Technically, the S&P 500 has not exceeded 4000 and is constantly knocking on the door. With the S&P 500 index, 4000 is roughly around 20 to 21 times the stock price-to-earnings ratio (PER), but it is difficult to overcome it unless the company’s performance is confirmed.

Interest rates, which have been the source of anxiety, continued to stabilize. The 10-year Treasury bond yield fell to 1.62% per year, and 30-year bonds also recorded 2.33% per year. On this day alone, it fell more than 7bp.

Although the Fed has decided to abolish the complementary leverage ratio (SLR), many analysts say that this will affect short-term Treasury bonds rather than long-term Treasury yields. Last year, the U.S. Treasury increased the issuance of short-term bonds, and banks also bought a lot of short-term bonds. This means that there will be little impact on the 10-year interest rate. In his testimony to the House Financial Services Commission, Chairman Jerome Powell said, “It is still difficult to comment on how the SLR adjustment will affect the financial system.”

It is observed that interest rates will stabilize for the time being. One bond trader said, “The mood has changed since last Friday.”

In fact, the two-year bidding conducted by the US Treasury Department went well on that day. An all-time high of $60 billion was put in bids, and the winning bid rate was formed at the expected 0.152% level, and the bid rate was 2.542 times, exceeding the recent average of 2.52 times. This raised the expectation that the 5-year and 7-year bidding that will follow on the 24th and 25th will proceed smoothly.

Another Wall Street official predicted, “All the materials that will increase the Treasury bond rate have been exposed,” and said, “This year’s interest rate may rise to 2% at the end of the year with the economic recovery, but it will be difficult to increase as much as in the last few weeks.

First, the Fed clearly revealed the direction of future monetary policy such as tapering and adjustment of the base rate. They also provided all estimates for inflation. And Joe Biden’s administration’s stimulus package and infrastructure deal were all out. The official said, “The monetary policy is no different from that, and everyone knows that inflation can rise to around 3% from the second quarter. The scale of the stimulus has also come out. Now, materials that will fall rather than rise in interest rates are highlighted. “I explained.

“We expect inflation to rise this year,” said Powell in the House of Representatives today. “The impact of inflation will not be particularly significant or sustained.”

As a factor in stabilizing interest rates, there is also an expectation that Japanese investors will return. Morgan Stanley analyzed that so far, the sale of government bonds came mainly from Japan. When we looked at the time when US Treasury sales were concentrated since January, we found that the Japanese bond market was crowded out during the opening hours. It was analyzed that this accounted for 85% of the causes of the recent rise in interest rates. “There is good reason to believe that bond sales in Japan will no longer last in April,” reminding Japanese financial firms that their fiscal year ends at the end of March, said Morgan Stanley’s Matthew Hornba bond strategist.

In particular, when foreign investors invest in U.S. bonds, considering the fact that the interest rate for 3-month U.S. Treasury bonds used for currency hedging purposes is very low (due to the zero interest rate of the Fed) at 0.01%, buying 10-year U.S. Treasury bonds has been in the past 10 years. This is the situation where you can get the highest rate of return.

Wells Fargo also published a report at the end of March that there could be significant bond buying ahead of pension funds’ portfolio rebalancing in the first quarter. Funds that operate their portfolios with 6 stocks and 4 bonds have recently changed their portfolio to the 6.3 level and 3.7 level due to the recent decline in bond prices, creating demand to sell stocks and buy bonds. Wells Fargo has estimated this to be around $25 billion.

There is also an analysis that the rebalancing of these pension funds contributed significantly to the formation of the bottom on March 23, a year ago. At that time, as interest rates fell sharply, bond prices rose and stock prices soared, leading to considerable stock demand.

Of course, the recent downward trend in bonds has raised questions about the 6-4 management strategy itself, so it is difficult to believe that all of these demands will occur.

The risk of corona re-proliferation, which is rising mainly in Europe, is also regarded as a risk that could slow the economic recovery and lower interest rates.

The bond market is stabilizing, but the corona re-proliferation and high valuations are again holding back the New York Stock Market, which marks its first anniversary in the bull market. Invesco’s Sebastian Mackie Fund Manager told The Wall Street Journal (WSJ), “The reflation theme is running into several hurdles. The economy is recovering, but it seems that we were moving too far ahead.” A Wall Street official said, “In fact, banking stocks, energy stocks, airline stocks, and cruise stocks have also risen too much in recent months. If the corona re-proliferates in a situation where the economy has not yet resumed, stock price adjustments could continue.”

In fact, looking at the return rate by index over the past year, the Russell 2000 Index, which is focused on small caps, rose the most by 126%, and the S&P 500 Energy Index also rose 102%. This is higher than the NASDAQ 100 index and 87% of the S&P 500 tech stocks.

The rising tax debate is also fueling stock market unrest. President Biden has pledged to raise the current 21% corporate tax rate to 28%, and to increase the minimum tax rate (GILTI) on offshore income through intangible assets from the current 10.5% to 21%. In addition, we promised that the highest rate of capital gains tax imposed on gains from the transfer of stocks and real estate will be approximately doubled from the current 20.0% to 39.6%. In a testimony to the House of Representatives on the same day, Minister Yellen explained, “If the economy strengthens again, we will expand investment in infrastructure and R&D, and there is a factor in raising taxes in the process.”

Goldman Sachs analyzes that “if full implementation of the tax increase plan as promised by President Biden, S&P 500 companies’ earnings per share (EPS) could be reduced by as much as 9%.”

Goldman Sachs forecasts the EPS of S&P 500 companies at $197 in 2022. This assumes a 3% decrease in profits due to tax increases. Based on this, the S&P 500 index is expected to reach 4300 at the end of this year and 4600 at the end of next year. If profits decline to 9%, Goldman Sachs’ S&P 500 forecast will have no choice but to fall.

Reporter Kim Hyun-seok [email protected]