The S&P 500 index is teetering on the edge of a rarefied perch, persistently brushing aside uncertainties created by the COVID-19 pandemic in its ascent.
Although the rally by arguably the most important stock-market benchmark in the world has stalled out, its proximity to an all-time closing peak has made a number of investors uneasy to say the least.
“Never before have I seen a market so highly valued in the face of overwhelming uncertainty,” James Montier, behavioral economist and member of GMO’s asset allocation team, wrote it in a recent research paper titled “Reasons (not) to be cheerful: Certainty, Absurdity, and Fallacious Narratives.”
“It appears as though the U.S. stock market has drunk from Dr. Pangloss’ Kool-Aid – where everything is for the best in the best of all possible worlds,” he wrote, referring to Voltaire’s character in Candide, who asserted the Pollyannish philosophy that the current state of affairs always represents the best of all possible worlds.
Of course, like Voltaire’s satirizing in Candide of 17th century philosopher Gottfried Wilhelm Leibniz, who also espoused the thesis of a sort of dauntless optimism, Montier thinks market participants may be far too cavalier about the equity index’s burst higher in the face of a unprecedented economic calamity created by the worst pandemic in modern times.
“It is as if Mr. Market is taking a tail risk (albeit a good one) and pricing it with certainty,” Montier wrote.
On Friday, the Dow Jones Industrial Average DJIA, -0.19% booked a weekly gain of 1.8%, finishing about 5.5% from its Feb. 12 record close, and the S&P 500 SPX, 0.28% rose 0.6%. The S&P 500 briefly traded above its Feb. 19 closing high of 3,386.15 on Wednesday and Thursday, but was unable to hang on.
The Nasdaq Composite Index COMP, 0.69%, meanwhile, finished barely positive for the week, up 0.1%. The index has posted 32 records so far in 2020.
If the S&P 500 is able to join the Nasdaq Composite in record territory at any point over the next several weeks, it will have traversed its bear-market low to a record high in the shortest span of time on record, according to Dow Jones Market Data. The current record recovery was 310 trading days from Feb. 9, 1966 to May 4, 1967. Thus far, 102 trading days have passed between the S&P 500’s March 23, 2020.
Montier’s concern at the pace of the recovery in stocks is one held by a number of bearish and bullish investors alike. How can the market surge so mightily after tumbling more than 30% to its lows in March against a backdrop of economic carnage.