The “explanation” for today’s 4.22% gain in the S&P 500 and the 4.53% gain in the Dow Jones Industrial Average is that it’s a reaction to the surprising victories by former Vice-President Joe Biden over Vermont Senator Bernie Sanders in last night’s Super Tuesday Democratic primaries.
And there’s some truth to that. The market has decided that the Sanders setback (TM reg.) is great news from healthcare stocks since Biden favors an expansion of Obamacare versus Sanders call for Medicare for All, which would certainly take a huge bite out of the revenue and profits of private healthcare companies and might shut down the sector entirely.
Today shares of UnitedHealth Group (UNH) were up 10.72% on the day. Anthem (ANTH) was ahead 15.62% at the close. Humana (HUM) gained 14.14%. Cigna (CI) tacked on 10.72%. The Health Care Select Sector SPDR ETF (XLV) rose 5.76%.
Certainly that helped power the market to gains that saw the NASDAQ Composite climb 3.85% on the day and the Russell 2000 small cap index rise 3.04%.
But if you look at the lat three days, I think you’ll see a much less positive interpretation of today’s and Monday’s gains, and Tuesday’s losses.
The extreme volatility in U.S. stocks is, in my opinion, a sign that stocks have become unmoored from any measure of value. With the economic and company specific impact of the coronavirus unknown, and with the extent and impact of central bank and government stimulus unknown, it’s really hard to figure out what stocks should be trading for. In the last few days I’ve seen speculation from Wall Street strategists and economists that the PE for the S&P 500 12 months from now based on projected earnings per share will be anywhere from 20 to 15. The current PE based on trailing 12-month earnings per share is 23.55. The forward PE, that is the PE based on projected earnings 12 months from now, hit 19 on February 21. That’s the first time that the forward PE for the S&P 500 has been at 19 since 2002. (The S&P 500 closed at a record high of 3386.15 on February 19.
The average forward PE for the S&P over the last five years is 16.7%. For the last ten years the average is 14.9.
What that leaves investors with is huge uncertainty about the value of the market as a whole and of individual stocks.
And that produces massive shifts in money as traders look to play a day’s story into short-term trading profits. And once those shifts are underway, the momentum players, human and artificial, pile on to drive the day’s action to incredible changes in value.
So I expect to see more days like those in the first part of the week when the market soared on expectations of a Fed move to cut interest rates, plunged on disappointment that the announced cut wasn’t bigger, and then soared again on the Democratic primary results.
Each day’s big move in one direction sets up potential profits for the next day’s counter move. But I don’t think there’s any real conviction here or a trend that you can follow for more than a day or so.