The S&P 500 stock price index rose yesterday morning but closed down slightly on the day (Fig. 1). It needs only to increase by 1.6% to be back at its February 19 record high.
Our 3500 S&P 500 target for the end of next year is likely to be hit before the end of this year—well ahead of schedule.
Joe and I therefore are raising our year-end 2020 target from 2900 to 3500. We remain bullish on 2021 as well. Our new target for the end of next year is 3800 (Fig. 2). It seems to us that the stock market already has discounted lots of the good news likely to occur through the end of next year.
The market is experiencing a meltup, making it hard to predict the upside and also raising the risk of a meltdown along the way up. The meltup that started on Don’t Fight the Fed Day (DFFD) continues. DFFD was Monday, March 23, the day that the Fed implemented QE4Ever with open-ended, open-market purchases of fixed-income securities (Fig. 3). That’s after the Fed lowered the federal funds rate by 100bps to zero on March 15 (Fig. 4).
The US Treasury joined the Fed’s stimulus party on Friday, March 27, when President Donald Trump’s signing of the CARES Act provided $2.2 trillion in fiscal stimulus (Fig. 5). Federal government spending on income redistribution jumped $1.48 trillion during Q2 to $4.64 trillion (saar) from $3.16 trillion during Q1. That more than offset the $795 billion drop in labor compensation during the quarter (Fig. 6). Now consider the following:
(1) Not-so-secret formula. The simple formula for what is happening is DFFD + CARES = MMT, where “MMT” is Modern Monetary Theory. Furthermore, MMT + TINA = MAMU, where “TINA” stands for “there is no alternative” to stocks when bond yields are close to zero and “MAMU” stands for the “Mother of All Meltups.” Our equations aren’t worthy of a Nobel Prize like Einstein’s E = MC2, but they explain why stocks have rebounded so dramatically since March 23.
(2) Stock market equation. The other relevant equation is P = P/E x E. That’s the stock market equation where “P” is the S&P 500 stock price index, “E” is the forward earnings of the S&P 500, and “P/E” is the forward valuation multiple. Joe and I weren’t surprised that forward earnings bottomed during the May 15 week and has increased every week since then through the week of August 7 (Fig. 7). However, it is up just 5.3% so far. Also bottoming in recent weeks are S&P 500 forward revenues and analysts’ consensus revenues estimates for this year and next year (Fig. 8).
The meltup has been led by the 74% jump in the forward P/E from a low of 12.9 on March 23 to 22.5 yesterday (Fig. 9). In recent weeks, we’ve attributed this remarkable jump in the forward P/E to the decisive drop in the 10-year Treasury bond yield below 1.00% on March 20 (Fig. 10). Along the way, Fed officials have reiterated their intention to keep interest rates near zero for the foreseeable future. For example, Fed Chair Jerome Powell famously stated at his June 10 press conference, “[W]e’re not thinking about raising rates. We're not even thinking about thinking about raising rates.”
(3) “Sputnik V” is here. Yesterday’s stock market action was driven by Russian President Vladimir Putin, who claimed that Russian scientists achieved a breakthrough in the global vaccine race. He announced that the country has become the first to approve an experimental COVID-19 vaccine and that his own daughter has already taken a dose. The vaccine is named “Sputnik V,” a reference to the first orbital satellite, which was launched by the Soviet Union in 1957 and set off the global space race.
The vaccine hasn’t had a Phase 3 trial yet. It has been tested in small, early clinical trials designed to find the right dose and assess any safety concerns. It was given to scientists who developed it, in self-experimentation that is unusual in modern science, as well as to 50 members of the Russian military and a handful of other volunteers.
Nevertheless, the stock market reacted positively to the vaccine news yesterday morning. It sold off late in the day, with weakness in the share prices of companies that have benefited from the pandemic’s economic impacts more than offsetting strength in those that have suffered from them. The FANGMANT stocks (Facebook, Amazon, Netflix, Google’s parent Alphabet, Microsoft, Apple, NVIDIA, and Tesla) sold off, while bank stocks rallied. Also worth mentioning is that precious metals prices dipped on the news out of Russia. Furthermore, bond yields rose.
Dr. Ed Yardeni is the president of Yardeni Research, Inc., a provider of independent global investment strategy research.
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