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Here’s Why the S&P 500’s Defiant Rally Will Continue

Last Updated September 23, 2020 2:04 PM
Mark Emem
Last Updated September 23, 2020 2:04 PM
  • The S&P 500 Index has recovered nearly all of its pandemic-related crash.
  • A gain of just 5% would see the S&P 500 index return to its record high.
  • A steady stream of good news could make this a reality soon.

The S&P 500 Index  reached a record high on February 19 when it hit 3,393 points. Then the pandemic killed the historic rally, sending the benchmark index down roughly 35% a month later.

Since hitting its March low, the S&P 500 has recovered significantly. The large-cap index is now roughly 5% shy of its February high. There’s a good chance that the index could return to record levels before the month is over.

S&P 500, SPX
The S&P 500 Index has recovered nearly all its losses since March. | Source: Yahoo Finance 

Various factors, like improving economic fundamentals and progress on a new vaccine, make this likely. Additionally, there exists the political will to undertake further measures to stimulate the economy.

Economic recovery is underway

A critical piece of economic data signaling recovery is retail sales. Last month, retail sales rose 7.5%  after spiking 18.2% the month before.

Unemployment has been falling, with a record number of jobs created last month. In June, nonfarm payrolls surged 4.8 million, beating the projected figure of 2.9 million.

S&P 500
If the June jobs report is anything to go by, unemployment figures will continue falling. | Source: @Jobs_AWorld/Twitter 

Additionally, hopes of an economic recovery have come from China, which recorded second-quarter growth of 3.2%. In June, China’s imports rose by 2.7%  from the same period a year ago.

A Vaccine will inject markets with a dose of optimism

The measures employed so far to contain the pandemic are not enough to return economic activity to pre-COVID levels. Effective treatments or vaccines are thus a much-needed solution.

In the past couple of weeks, there have been growing hopes that effective treatments and vaccines will be found.

There are currently over 155 vaccine candidates being tested , with 23 of them now being tried on humans. Four vaccines are in the final stages of large-scale efficacy tests.

Medical researchers around the world have made significant progress towards creating a vaccine just seven months after the pandemic started. | Source: @GiraudSylvain/Twitter 

Earlier this month, Moderna’s (NASDAQ:MRNA) vaccine candidate was reported to have triggered an immune response in trial participants. Most importantly, the trial participants only experienced mild side effects.

As for treatments, there is no cure yet. There are 19 treatments , according to the New York Times. Two of these vaccines are currently in extensive use.

With such rapid progress made on the medical front, investors are betting that a return to normalcy is not far off. Investors’ optimism is boosting the likelihood of the S&P 500 returning to record highs sooner than later.

Another stimulus check will lead to another S&P 500 high

The additional unemployment benefits offered under the $2 trillion CARES Act will end on July 31 . With U.S. unemployment at double-digit levels, the extra payments have supported the economy, including improving retail sales .

S&P 500
Stimulus checks and additional unemployment payments are believed to have boosted consumer spending. | Source: @jbarro/Twitter 

Letting the program expire without a replacement would, therefore, create severe headwinds for the economy.

Fortunately, Congress is working on four plans  aimed at addressing the economic fallout from the pandemic. Among these is sending more stimulus checks to Americans. Support from President Trump and Treasury Secretary Steven Mnuchin increase the likelihood of new stimulus being passed.

With more money in consumers’ pockets, higher spending is likely. Investor confidence will get a boost, and the S&P 500 Index will respond in tandem as it marches towards new highs.

Disclaimer: This article reflects the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.