By Gunjan Banerji
The Dow Jones Industrial Average's wild round trip is nearly
The venerable stock index, despite a recent hiccup, has nearly
recovered all the losses suffered during the coronavirus pandemic,
an epic journey during one of the most catastrophic economic
collapses in U.S. history.
The Dow and the benchmark S&P500 plunged about 35% within
six weeks this spring -- the fastest-ever fall from record levels
into a bear market -- as the economy shut down and the virus spread
across the country. Since then, U.S. stocks have been on a winning
streak that is unprecedented in the modern era of financial
The Dow is near Feb. 12's all-time high, while the S&P 500
recently staged its most robust five-month rally in more than 80
The S&P 500's journey from record high to a bear market --
defined as a drop of 20% or more -- to a new record took just 126
trading days, the fastest-ever such climb. In previous downturns
going back to 1928, it took an average of more than 1,500 sessions
for the index to return to record levels, equivalent to about six
This year's wild ride is even more striking against the backdrop
of the recession and pandemic gripping the U.S. Millions of
Americans remain unemployed, corporate profits have collapsed at
the steepest rate in a decade and the pandemic hasn't been
Despite a two-week rout fueled by shares of big technology
companies, U.S. stocks sharply rebounded to start the week.
"I don't think there's any analog in history that looks like
this," said Benjamin Bowler, head of equity derivatives research at
Bank of America Corp.
Here's what's driving the historic rally:
1. Stimulus from the Fed and Congress
A key factor differentiating this crisis is the response of the
Federal Reserve and U.S. government, which was speedier and
mightier than ever before. The Fed cut interest rates to near-zero
and outlined plans to lend billions of dollars across markets. The
U.S. government sent more than 150 million stimulus checks to
Americans and backed around half a trillion dollars in loans to
The response, alongside lessons learned from the financial
crisis of 2008, helped spark the stock market's rebound. Many
investors say history has taught them it isn't wise to bet against
the Fed. Wading into the market during swoons big and small has
been profitable over the past 10 years.
That helped make the market's recovery almost as jarring as the
"Shocks are more violent," said Mr. Bowler of Bank of America.
"But the recoveries are more violent too.... Everyone chases the
market back up."
The Fed also appeared to absorb some lessons from the last
crisis. Moving early and aggressively is important, Patrick Harker,
president of the Federal Reserve Bank of Philadelphia, said in
The Fed's intervention had another unintentional effect: As it
bought corporate and Treasury bonds, yields tumbled, making stocks
even more attractive.
The real yield on Treasurys slipped to negative levels as bond
prices rallied, meaning investors who park their money in
government bonds can expect to lose money when adjusted for
inflation. The dwindling returns pushed investors into stocks, a
scramble that has become so familiar it has its own acronym: TINA,
or There is No Alternative.
2. Expectations of a strong recovery
Underpinning the stock rally is an unwavering faith that the
U.S. economy will bounce back once the pandemic is under
Many believe the worst has passed. Manufacturing activity
accelerated in August, hiring has increased for four straight
months and consumer spending has picked up after a precipitous
Analysts say the skid in corporate profits has likely bottomed,
too. Earnings among companies in the S&P 500 declined 32% in
the latest quarter, the deepest drop since 2009, according to
FactSet. They are expected to continue falling through the rest of
the year, but at a more modest pace. Next year, analysts expect
earnings to surpass levels recorded before the pandemic.
Meanwhile, private-sector economists expect annual gross
domestic product to bounce back next year at a rate rarely seen in
the past 70 years, according to the Leuthold Group, a research
"Everything about this crisis has been outsized and has moved at
warp speed," Jim Paulsen, chief investment strategist at Leuthold,
wrote in a note to clients in August. "If the economy continues its
recovery and real GDP growth is anywhere close to the current
consensus view, the stock-market bull may just be getting warmed
Goldman Sachs Group Inc. analysts recently said they expect the
S&P 500 to hit 3600 by the end of 2020, a 6.4% increase from
Monday's close. Bank of America analysts said they can envision a
"melt-up" in which stocks continue to advance rapidly.
3. The dominance of the tech giants
The gap between the stock market's winners and losers is stark
and growing. Tech behemoths have benefited from societal changes
forced by the pandemic and are increasingly influential in the
One of them, Apple Inc., is bigger than entire global markets.
Apple shares have skyrocketed 57% in 2020 and were recently worth
more than all of the small companies in the Russell 2000 index
combined, or the FTSE 100 index, which tracks the biggest companies
listed on the London Stock Exchange. Meanwhile, companies in
industries battered by the pandemic have seen their sway in the
stock market wane.
The five largest companies in the S&P 500 -- today that is
Apple, Amazon.com Inc., Microsoft Corp., Google parent Alphabet
Inc. and Facebook Inc. -- recently made up about 23% of the index,
the highest concentration in at least 30 years, according to
Goldman Sachs analysts. Apple, the biggest company in the U.S.
stock market, has contributed more than half of the index's 4.8%
total return this year, according to S&P Dow Jones Indices data
Investors are betting that influence will grow as Americans
continue working from home, and shopping and streaming movies
online. Amazon shares have jumped 68% in 2020, Microsoft 30%,
Facebook similarly 30% and Alphabet 13%.
One way to gauge the outsize influence of those stocks: A
version of the S&P 500 that gives every stock an equal
weighting is still down 4.4% in 2020, while the standard benchmark
has climbed 4.7%. Within the S&P 500, the energy, financials,
utilities, real-estate and industrial segments are still in the
The group's heft can leave the broader market vulnerable to big
declines. The tech giants pulled the market lower last week as
concerns grew about whether they had risen in value too far, too
In one sign of the energy sector's diminishing influence, Exxon
Mobil Corp. was recently dropped from the Dow industrials, ending a
tenure that dated to 1928. Energy now makes up less than 3% of the
Dow and S&P 500.
"The stock market is comprised of the biggest and strongest
companies.... It is not representative of the entire economy,"
hedge-fund billionaire William Ackman, founder of Pershing Square
Capital Management LP, wrote in a recent letter to shareholders.
"If there were a stock market index of private, small businesses,
it would likely be down 50% or more."
Mr. Ackman has raised $4 billion in an initial public offering
of his blank-check company. Such firms, which are designed purely
to raise money to make acquisitions, have grown in popularity this
year as investors bet there will be attractive deals when the
4. The return of individual investors
It is impossible to ignore the stampede of individual investors
entering the stock market. During the first six months of the year,
they made up roughly 20% of market activity, nearly double the
level from 2010, according to Bloomberg Intelligence. It has never
been easier to trade.
Novices stuck at home during the pandemic opened brokerage
accounts, enticed by rock-bottom commissions and the chance to
profit from stocks' gyrations. The market moves have also brought
in younger investors trying their hand at stock or options
These newbie investors are trading tips on Facebook groups and
swarming discussion forums on Reddit. They are following
stock-market influencers on social media platform TikTok and
chatting with other young traders round the clock on the messaging
"When I talk to people with gray hair, they all feel nervous
about this market," said Zhiwei Ren, a portfolio manager at Penn
Mutual Asset Management. "It is a very dangerous market. For retail
investors, it's the best market."
Many of these investors, alongside institutional players, have
piled into stocks they view as beneficiaries of the pandemic, or
those that they think can reshape industries.
Sports-betting operator DraftKings Inc. has rallied 354% to a
record, while human-spaceflight company Virgin Galactic Holdings
Inc. has jumped 51%. Individual investors also flocked to shares of
Eastman Kodak Co. after a disclosure of a possible $765 million
government loan to make drug ingredients at U.S. factories. That
helped drive them up as much as 614% before they lost most of those
And, of course, there is Tesla Inc. which has gained 402% this
year, making it the most valuable auto maker in the world, the
eighth largest company in the U.S. stock market and one of the most
hotly debated companies.
Interest -- both in trading and Tesla -- has swelled. As of
June, posts tied to #stockmarket had garnered about 250 million
views on TikTok. By September, that figure swelled to about 420
million views. One popular post: "How To Invest in the 'Next
5. Momentum trading
In many ways, Tesla epitomizes today's market, in which retail
and institutional investors have chased companies promising high
growth. The car maker has become synonymous with 2020's hot
momentum trade -- piling into stocks that have climbed the fastest
and furthest. Few stocks can match the velocity with which Tesla
Data from Société Générale SA as of June show that individual
investors tend to prefer stocks that have risen the most over the
past three months. Traders using the Robinhood Markets Inc.
brokerage increased their holdings of such shares dramatically
since March, outpacing investments in companies with the worst
price performance. Investors have also piled into exchange-traded
funds tracking the momentum trade.
And like the broader market, Tesla has been painfully difficult
to bet against. Few saw its dramatic rise coming, and the ascent
continues to alarm, and burn, many investors who sought to profit
from its demise.
Technical dynamics help explain the stock's mind-boggling gains,
since bearish wagers on the company have inadvertently fueled
Tesla's rise, and derivatives bets tied to its advance have helped
intensify the rally.
Many investors aren't just buying small dips in the stock market
or individual shares like Tesla. They are looking for turbocharged
trades that profit when individual stocks quickly rise and, at
times, borrowing money to bet big.
Stock-options volumes jumped to a record this year, and trades
that pay out if stocks continue to soar have been popular in recent
months. These derivatives, known as call and put contracts, allow
investors to put down a small amount of cash for a potentially
quick and outsize return if their bets prove correct. Although they
can magnify profits, they are extremely risky.
These trades are increasingly influential on the stock market
itself. Mammoth options bets by big investor SoftBank Group Corp.
helped drive the market's recent roller-coaster, along with trades
from individual investors.
Barclays research shows that stocks benefiting from the highest
increase in options trading over the past year have outperformed
the market this year. In addition to Tesla, these stocks include
Amazon.com, Apple, Microsoft, Shopify Inc., among others.
"You're getting a real squeeze that's bigger than it normally
would be," said Cem Karsan, a senior managing partner at hedge fund
Aegea Capital Management LLC. He says he has bet against some tech
stocks this year and bought options that would profit if the tech
sector soared through the end of the year. "These things always go
further than you could possibly imagine."
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
(END) Dow Jones Newswires
September 15, 2020 11:26 ET (15:26 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
From Aug 2020 to Sep 2020
From Sep 2019 to Sep 2020