It’s no surprise to anyone paying the least bit of attention that COVID-19 —- and the response to it — has been a key driver for financial markets in 2020.
But the chart below from Renaisance Macro Research delves deeper, offering a detailed estimate of just how much the pandemic and other factors have each contributed to the performance of the S&P 500 so far this year.
The chart comes from the research firm’s news-headline analysis of the stock market. At the end of each trading day, RenMac assigns a macro factor to that day’s market move based on the Bloomberg market wrap headline, explained Neil Dutta, head of U.S. economics, in a Monday note.
“For the markets, this year has been about two factors: COVID-19 and the fiscal and medical response to it,” he wrote.
As the chart shows, bad news on the pandemic front has been the biggest drag on stocks so far this year, while headlines about aid spending have been the biggest upside contributor. Progress toward vaccines has also offered a lift, while election-related news and key fundamentals like earnings and economic data have had much less cumulative impact.
Stocks plummeted from record highs in February into a bear market, with the S&P 500 SPX, -0.19% bottoming in March nearly 34% off its peak. Stocks subsequently came back, with the large-cap benchmark pushing back into record territory in August. Stocks rallied sharply in November as investors cheered rapid progress on multiple vaccine candidates.
Stocks were put in a mixed performance Monday, but have extended November’s gains into the final month of the year. The S&P 500, Dow Jones Industrial Average DJIA, -0.49%, Nasdaq Composite COMP, +0.45% and the small-cap Russell 2000 RUT, -0.06% all finished at record highs Friday — a rare superfecta for Wall Street.
Dutta highlighted three important things from the data:
–As COVID 19 spread earlier this year, the fiscal response was quite immediate. The tailwind to stocks from looser fiscal policy almost fully offset the initial shortfall from bad news on COVID.
— Lately, the offset to negative news around COVID – the virus has been spreading more rapidly of late – has been better news on the medical front. Vaccines bring promise that the pandemic will end.
–Fiscal stimulus may help lift stocks again. There are rumblings that Senators are coalescing around a $900 billion compromise that President Trump is willing to sign.
Dutta said RenMac expects the prospect for additional spending and good news around vaccines to outweigh the negative impact of rising COVID-19 cases to provide another lift for equity prices.