Market edges toward euphoria, despite pandemic's toll

The stock market will not quit.

Already notable for its mostly unstoppable rise this year — despite a pandemic that has killed more than 300,000 people, put millions out of work and shuttered businesses around the country — the market is now tipping into outright euphoria.

Big investors who have been bullish for much of 2020 are finding new causes for confidence in the Federal Reserve’s continued moves to keep markets stable and interest rates low. And individual investors, who have piled into the market this year, are trading stocks at a pace not seen in over a decade, driving a significant part of the market’s upward trajectory.

“The market right now is clearly foaming at the mouth,” said Charlie McElligott, a market analyst with Nomura Securities in New York.

The S&P 500 index is up nearly 15% for the year. By some measures of stock valuation, the market is nearing levels last seen in 2000, the year the dot-com bubble began to burst. Initial public offerings, when companies issue new shares to the public, are having their busiest year in two decades — even if many of the new companies are unprofitable.

Few expect a replay of the dot-com bust that began in 2000. That collapse eventually vaporized about 40% of the market’s value, or more than $8 trillion in stock market wealth. And it helped crush consumer confidence as the country slipped into a recession in early 2001.

But it’s increasingly common to hear market analysts refer to that time when trying to make sense of current market trends.

“We are seeing the kind of craziness that I don’t think has been in existence, certainly not in the U.S., since the internet bubble,” said Ben Inker, head of asset allocation at Boston-based money manager Grantham, Mayo, Van Otterloo. “This is very reminiscent of what went on.”

The gains have held up even as the fate of an economic stimulus bill passed by Congress was thrown into question when President Donald Trump denounced it. Although the stock market ended with a small loss this past week, the S&P 500, Dow Jones industrial average and Nasdaq are just shy of record highs.

There are reasons for investors to feel upbeat. The Electoral College voted Dec. 14 to formalise the victory of President-elect Joe Biden, bringing an end to a contentious presidential election that had weighed on markets. A nationwide inoculation push against the coronavirus has begun, signaling the start of an eventual return to normal.

Many market analysts, investors and traders say the good news, while promising, is hardly enough to justify the momentum building in stocks — but they also see no underlying reason for it to stop any time soon.

Yet many Americans have not shared in the gains. About half of U.S. households do not own stock. Even among those who do, the wealthiest 10% control about 84% of the total value of these shares, according to research by Ed Wolff, an economist at New York University who studies the net worth of American families.

Party Like It’s 1999

Perhaps the clearest example of unbridled investor enthusiasm comes from the market for IPOs. With more than 447 new share offerings and more than $165 billion raised this year, 2020 is the best year for the IPO market in 21 years, according to data from Dealogic. (In 1999, 547 IPOs raised roughly $167 billion in today’s dollars.) Investors have embraced small but fast-growing companies, especially ones with strong brand names.

Shares of food delivery service DoorDash soared 86% on the day they were first traded this month. The next day, Airbnb’s newly issued shares jumped 113%, giving the short-term home rental company a market valuation of more than $100 billion. Neither company is profitable. Brokers say strong demand from individual investors drove the surge of trading in Airbnb and DoorDash. Professional money managers largely stood aside, gawking at the prices smaller investors were willing to pay.

“It was beyond the realm of reasonable valuation,” said Doug Rivelli, president of institutional brokerage firm Abel Noser in New York.

For companies that went public in December, shares on the first day of trading jumped roughly 87%, on average, as of the week that ended Dec. 18. That’s the highest since early 2000, when the tech bubble began to burst.

“It’s not as obvious a bubble as 20 years ago,” said Jay Ritter, a finance professor at the University of Florida who studies initial public offerings. “But we’re close to bubble territory.”

The market appears overheated by another gauge that investors often use to determine how cheap or expensive a stock is: its price relative to the profits it’s expected to make. Currently, the so-called price-to-earnings ratio for S&P 500 companies is above 22 and has been for much of the year. The last time the market was consistently above that level was in 2000.

Small Investors Pile In

The appetite of individual investors has been an unexpected byproduct of the pandemic. For many, trading stocks started as a way to indulge their speculative itch when other avenues, such as sports gambling, were effectively shuttered.

Tim Mulvena, a 32-year-old medical software salesman in Oneonta, New York, was one of them. He first logged on to Robinhood, a free-trading app popular with small investors, in March and started to buy stocks as the markets were collapsing.

“I have got to dabble and just see where this takes me,” Mulvena said.

He has notched gains of roughly 60% on Apple, his largest position. And his investment in Penn National Gaming, a regional gambling company that bought Barstool Sports, a digital sports site Mulvena was a fan of, has more than doubled.

Even those who have stuck with less active investments — like 401(k) investors dutifully contributing to plain vanilla index funds — have gained from the market’s upward drift, enticing further inflows. Analysts at Bank of America Merrill Lynch recently cited “frothy prices, greedy positioning” as the reason for huge inflows into equity market mutual funds and exchange-traded funds in the past six weeks.

Much as they did in the 1990s, smaller investors are pouring money into trendy, tech-focused companies, many of which have seen their businesses gain traction during the pandemic. Their favorites include cloud computing software maker Snowflake, online surveillance company Palantir and energy storage company QuantumScape, which is up 144% in December alone. Investors also like Etsy, the online marketplace, which is up 330% this year. Just over a week ago, 908 Devices — a maker of hand-held analytic devices — rose about 150% in its trading debut.

And Tesla, a favorite of retail investors that joined the S&P 500 on Monday, is up 691% this year, giving it a market value of more than $600 billion.

Easy Money Policies Continue

When the pandemic began to tear across the United States in March, the Fed — which sets monetary policy — cut interest rates to near zero and began pumping hundreds of billions of dollars into financial markets to keep them functioning. The central bank also introduced a slew of lending programs helping to stave off corporate bankruptcies. Those actions touched off the stock market’s rebound after it collapsed briefly in February and March.

The Fed is still pumping some $120 billion in newly created dollars into financial markets each month by purchasing Treasury bonds and government-backed packages of mortgages. The strategy is similar to “quantitative easing” programs put in place by the Fed during and after the 2008 financial crisis, when it bought bonds to inject money into the economy and spur expansion.

There is some debate about the extent such programs strengthen the real economy, but financial markets have responded well: Quantitative easing helped spur a 400% rally in the stock market that began in March 2009 and continued until this February. That gives credence to the view that as long as the Fed is focused on keeping interest rates low in the bond markets — the main alternative to buying stocks — investors will have little choice but to move their money to the riskier stock market in search of better returns.

The Fed signaled this month that it would keep interest rates at rock bottom and continue to buy government-backed bonds for the foreseeable future. That amounts to a powerful tail wind for the stock market.

“You have this grand maestro up in the front that’s conducting the orchestra,” Mike Lewis, head of U.S. cash equities trading at Barclays in New York, said of the Fed’s easy money policy. “And until they stop, the music is going to continue to play.”