A global pandemic, racial strife, political upheaval — and a rising stock market amid the chaos. While it sounds a lot like 2020 it also has echoes all the way from 1968.
Both years featured history-making levels of tumult, and both could end up being good years for investors. While the current market still has some ground to make up, the trend over the past two-plus months has been aggressively higher, confounding those who can’t reconcile the disconnect.
Maybe it shouldn’t be such a surprise, though. In a market increasingly driven by dispassionate computers that run on algorithms, and investors who at least in theory are always looking ahead, the tendency to gaze beyond the news of the moment is always there.
Through midday, the Dow Jones Industrial average was up 65 points.
“The market always seems heartless, without any emotion, without caring, without empathy. But that’s the nature of the market,” said Quincy Krosby, chief market strategist at Prudential Financial. “The algorithms almost certainly have no shred of empathy. They’re not supposed to.”
Still, the market often will pop or drop on a headline, whether it’s directly market related, an economic data point or some geopolitical development.
More recently, news of potential therapeutics and vaccines for the coronavirus has set the market surging as they’re seen as indicative of hopes that the pandemic can be thwarted. Conversely, the market has tended to look through some awful developments on employment, retail sales and corporate earnings.
While it would have seemed logical that the protests and rioting of recent days stemming from the death of George Floyd in Minneapolis would have had some market impact, major averages on Monday posted small gains while the rest of the country tried to clean up after the mayhem.
“There are many valid reasons to be bearish on risk assets like stocks or corporate debt just now, but history shows markets look through many sorts of tumultuous events and have done so for decades,” said Nicholas Colas, co-founder of DataTrek Research. “That may seem counterintuitive, and perhaps not even ‘fair,’ but it’s absolutely true.”
One of the clearest examples comes from 1968.
Death, destruction and disease
The Rev. Martin Luther King and Robert F. Kennedy were both assassinated. North Vietnam launched the Tet Offensive and the 1968 presidential election featured a highly divisive contest between Hubert Humphrey and Richard Nixon. Protests abounded around the nation and the world, featuring the memorable raised-fist salute from John Carlos and Tommie Smith at the summer Olympic games.
And, of course, there also was the H3N2 “Hong Kong flu” pandemic that killed nearly 100,000 Americans and millions more globally, and still kills tens of thousands a year.
The end result for the market the year: After a 9% drop for the S&P 500 from January to March, the market rallied 24% and ended with a price gain of 7.6%. Thus far in 2020, the index is still down about 5.7% year to date, but a 36% rally off the March low has investors thinking that another headline-defying result could be on the way.
“1968 was the year that ‘shattered America’ and many tumultuous events and violence took place in that year. And despite that, the equity markets managed to perform solidly,” wrote Tom Lee, head of research at Fundstrat Global Advisors. “1968 is a reminder that stocks and world events are not always connected.”
To be sure, with things this tumultuous, there’s always the threat the things could go south quickly.
Any sign that the economy won’t heal as quickly as the market is pricing, or that the geopolitical issues and social protests could be more destabilizing, could hurt a market that has been boosted by hopes for a quick turnaround fueled by policy accommodation on a scale never attempted before.
Colas notes that the market pushed through tough times before, like 1998-99 when then-President Bill Clinton was impeached and 2011 when Occupy Wall Street protests were prevalent. But the market will have to atone this time if there are signs that more fundamental damage has been done.
“What matters to markets right now is how/when the US economy restarts from COVID Crisis shutdowns,” Colas wrote. “If protests or political spillover start to hurt consumer confidence, that would spell lower stocks prices for a longer period than a week or two.”
