Reflation, Inflation, Deflation: Stocks Can Live With Everything

Markets are vulnerable to “significant declines” should risk appetites falter, the Federal Reserve has warned. At the moment, there are very few signs of that happening.

Stocks, in particular, seem able to shrug off any scenario the economy can spit out. Growth running hot? Banks and transports gain, as they did for all five days this week. Hiring hobbled? Big rebound in stay-at-home tech plays, like Friday’s in the Nasdaq 100 and Cathie Wood’s ARK Innovation ETF. Surging commodities sowing inflation angst? Buy materials makers, which just had their best week in six months.

“That is amazing. No matter what, we’ve seen the market predominantly go up, not down,” Susan Schmidt, head of U.S. equities at Aviva Investors, said by phone. “The market overall is still saying, we believe in the business recovery and we’re still betting on it.”

While the various twists have taken momentary tolls on all manner of peripheral indexes, they’ve all been virtual manna from the S&P 500, which just rose for its eighth week in 10 and is now up almost 13% year-to-date. More impressive is the index’s resilience in the face of valuation measures that are by many metrics as rich as they’ve been since the dot-com bubble.

How precarious is the market’s altitude? Consider data from Leuthold Group, which compared prices today to their average levels since 1995, a starting point picked to correspond with a broad upward shift in valuations. When plotted against metrics like sales and earnings, the S&P 500 is at risk of falling 37%, should a reversion to the mean occur.

Despite the drumbeat of bubble warnings, stocks march on. To skeptics, it’s a precarious perch riven with risks. Others simply see the persistent buoyancy underlining broad-based strength, allowing traders to find ways to stay invested as long as the economy holds up.