Stocks roared past their record highs Tuesday, powered by rising tech shares and robust quarterly earnings from retailers such as Walmart and Home Depot.
The S&P 500 index closed at a record 3,389 on Tuesday, erasing all losses since the coronavirus pandemic took hold. The Nasdaq Composite also closed at a record high, topping 11,210. The Dow Jones Industrial Average closed slightly down, at 27,778.
The stock market is soaring even though the unemployment rate is at 10.2 percent and the Main Street economy continues to be ravaged by the pandemic.
Even as many business owners struggle to keep their doors open and their employees paid, segments of the tech sector and big-box retail are thriving in spite of — or because of — the constraints COVID-19 has put on consumers.
President Donald Trump — who has a habit of using the stock market as a barometer of his administration's success — touted the rise in a tweet Tuesday morning, crediting his administration and himself. "Jobs are flowing, NASDAQ is already at a record high, the rest to follow," he wrote.
The economy added 1.8 million jobs in July, but the country has recovered fewer than half of the jobs it lost in March and April, and the unemployment rate remains over 10 percent.
Economists say the market's meteoric rise is, in part, a function of how the major stock indices are calculated. While the stock market includes thousands of listed public companies, the indices comprise just a tiny sliver of the very largest ones. The S&P 500 and the Nasdaq are both market-cap-weighted, which means that, for better or worse, the fortunes of the biggest corporations overshadow the performances of the other companies in the index.
The combined market cap of the S&P's top five companies represents 25 percent of the entire index. Apple alone has a market cap of around $1.9 trillion — a figure slightly larger than the gross domestic product of Canada last year. In their most recent earnings reports, the five biggest companies in the S&P 500 — Apple, Microsoft, Amazon, Facebook and Google's parent, Alphabet — all notched gains. Walmart and Home Depot both reported higher-than-expected earnings Tuesday thanks to unexpectedly strong sales.
"It's not a broad-based recovery, but because the indices are dominated by a handful of companies, it has an amplified effect," said Michael Eckton, CEO and managing partner of Crestwood Advisors.
"These are companies that have been beneficiaries, relatively speaking, of what's been happening, and that's having an amplified effect when the broader economy and many other stocks are still struggling," Eckton said. The corporate behemoths have cash on hand, as well as lenders eager to let them borrow money at low interest rates, and they have options to get them through even a deep recession, such as laying off employees or spinning off business lines.
A small business, on the other hand, could be wiped out by a sustained slump in revenue, a reality many are facing as federal assistance dries up. "You have companies on Main Street like your small mom-and-pop businesses — they're much less likely to adapt because they're living day by day," said Luke Lloyd, a wealth adviser and investment strategist at Strategic Wealth Partners.
Pulling out the S&P's five tech heavyweights yields a very different picture, one that looks a lot more like the "real" economy, said Jeff Mills, chief investment officer of Bryn Mawr Trust.
"Most stocks are not making new recovery highs. If you remove the five largest stocks in the index, the S&P 500 would actually be down 4 percent rather than up 3 percent" this year, he said. "This narrowness of where investors are looking to put their money within equities is a big part of the story."
The Federal Reserve's massive policy interventions also play a role, both by reassuring investors that the stock market is safe and by indirectly chipping away at the returns people can earn on safer assets like Treasury bonds by holding interest rates near zero — and indicating that it will continue to do so for the foreseeable future. "I don't know if it's a good argument for the long term, but in the near term, people don't have anywhere else to go," Mills said.
Economists characterize the stock market as forward-looking — the nation's overall financial situation might be in a shambles now, but investors are placing a wager that brighter days are ahead. This inherent optimism could become an Achilles' heel if the U.S. fails to control the spread of COVID-19 and the resulting economic fallout.
The market's gains are especially vulnerable given that prices are implicitly based on the expectation that a lot more fiscal stimulus will go to American households and businesses, as well as a breakthrough in a treatment or a vaccine for the coronavirus.
"That optimism includes some level of treatment or vaccine," Mills said. "The market would certainly be disappointed if we went between now through the end of this year without any obvious progress towards a vaccine."
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Consumer-facing businesses benefited from people who spent their stimulus dollars, along with the extra $600 weekly unemployment assistance. That program has expired, and a polarized Congress has been unable to agree on the size and shape of any additional fiscal stimulus for families and mom-and-pop businesses. Experts say that makes sustaining consumer spending — the engine that drives 70 percent of the economy — critical but increasingly difficult.
"We've seen a strong rebound in retail sales. It almost looks like a V-shaped recovery on the consumption side of things. Now we're kind of at this inflection point," said Charlie Ripley, a senior investment strategist at Allianz Investment Management. "We're starting to see some signs that the benefits of that stimulus are starting to wane."
Congress doesn't have much time, market observers say. The more small businesses that have to shutter permanently, the greater the ripple effect on U.S. workers — and the harder it will be to regain the jobs that vanish.
Investors are largely ignoring the prospect of a sustained period of double-digit unemployment, Lloyd said — and Main Street's pain could mean a shakeout that reaches into the corridors of Wall Street. "The longer that we're away from a roughly 5 percent unemployment rate, the more of an issue we're going to have for the long-term economy," he said.