The SPDR S&P 500 ETF (NYSEARCA:SPY) had another impressive year in 2019, with the return of SPY stock at over 16%. This exchange-traded fund, which is actually the first one ever created (the launch was January 1993), is one of the most popular, with assets under management at about $322.5 billion.
Earlier in the year, the prospects of SPY stock looked dim. With the emergence of the Covid-19 virus, the markets went into bear mode. But of course, this was temporary (it lasted for about a month or so). Since March, SPY stock would go on to surge about 70%. It was one of the biggest turnarounds ever for the S&P 500.
It certainly helped that the U.S. government provided substantial fiscal stimulus. Then there was the easy monetary policy from the Federal Reserve. The rock-bottom interest rates have made equities look much more attractive.
But then again, can the good times last? Will we see continued strong gains in the new year? Well, I think it could be tough – and let’s see why:
Politics and SPY Stock
Any time there is a new Administration, there are potential risks. Other countries may see this as an opportunity to test the incoming President.
For example, what might China do now? Will it take more forceful actions on trade? Or even be more militarily adventurous?
Then there is the Middle East. Iran has been quiet lately but this could change quickly. The country is mired in economic problems, which have been aggravated by the Covid-19 pandemic. It would not be a surprise to see Iran get more aggressive. If so, this would definitely rattle markets and put pressure on President Biden to take action.
The Possible Bubble
One sign of a top of a market is when there is a bubble. We’ve seen this in the late 1920s and 1990s.
As for now, there are ominous signs that we may be seeing something similar. Consider the IPO market, which has seen large gains, especially from tech operators like Lemonade (NYSE:LMND), C3.ai (NYSE:AI) and Palantir Technologies (NYSE:PLTR).
Then there is the market for special purpose acquisition companies (SPACs). These are shells that merge with operating companies. Such deals have seen extreme volatility. One example is QuantumScape (NYSE:QS), which is a developer of solid-state lithium batters for electric vehicles. In August, the company’s shares were trading at $10 and they quickly ran up to $132. But as of this week, the shares have plunged to $48!
Another sign that the markets are getting frothy is the participation of retail investors. Many of them are working remotely and have time to engage in trading. They are also engaging in high-risk investment approaches. This is evident with the jump in option volumes, which are at record levels.
Then there has been a spike in margin loans. So if there is a pullback in the markets, this leverage will be unwound and accelerate the pressure on the downside.
It’s true that bubbles can last awhile. But there are often occasional corrections anyway. Even during the huge run-up in 1999, there were four of them. But interestingly enough, as for the past year, there has not been a meaningful downturn since March.
The Economy and SPY Stock
The Covid-19 vaccines from Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) are amazing feats of science and innovation. They have also been a major catalyst for a big move in the markets for the fourth quarter.
But the enthusiasm may have been overdone. The fact is that Covid-19 continues to get worse and this will weigh on the economy.
In the meantime, the distribution of the vaccines has proven to be extremely challenging. In other words, the U.S. may not get back to normal levels of activity until the second half of 2021 – and this could be a reason for the bull run in SPY stock to reverse.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.