It’s the anniversary of the big drop: What’s changed? 

Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen are testifying before the House Financial Services Committee on the state of the economic recovery from the COVID-19 pandemic on Tuesday.

It’s the one-year anniversary of the market’s bottom: Investors are expecting Powell to stick to the script, reiterate rates near zero for the next two years. But Powell and Yellen are also expected to be asked what, if anything, they learned about managing the biggest crisis since the Great Recession in 2007-2009.

The S&P 500 bottomed on March 23rd, 2020. From the mid-February, 2020 high to the March 23 bottom, the S&P dropped 34%, its biggest drop since the 50% decline in the Great Financial Crisis. 

The big difference between now and then: the breathtaking speed of the recovery. In the Financial Crisis, the S&P did not return to its old high until February 2013, nearly six years later. In the case of the Covid drop, the S&P returned to its February 2020 high in August of that year, a mere six months later and is now up 75% from that March 23 bottom.

The Great Financial Crisis, of course, was a different kind of disaster than Covid, but the speed of this recovery was nonetheless breathtaking.

What accounted for the breathtaking recovery? Most traders cite the lessons the Fed learned from the Financial Crisis. 

“The Fed had a  playbook from the last time around [the Financial Crisis], they accelerated it and sped everything up,” Peter Cecchini from AlphaOmega Advisors told me. ”They went really big “

Cecchini noted the Fed instituted a massive monetary stimulus program, cutting rates almost to zero, and unveiled plans for massive asset purchases. ”The biggest difference was the primary and secondary lending facilities that intervened in the corporate bond market,” he said. ”Even though they did not buy that much debt, the Fed said, ‘Corporate America, you can count on us. We will not let the corporate bond market implode.’ And that had a huge effect on confidence.”

Chris Murphy, co-head of derivative strategy at Susquehanna, also credited science, which is not usually a factor in stock rallies: ”The other good news is that this felt like a temporary thing, depending on getting a vaccine, whereas no one was sure how long the Financial Crisis was going to last.”

While all 11 sectors of the S&P are well off that March 23 low, the biggest movers are those sectors that were the most direct beneficiaries of the Fed and Congressional largess: small caps, commodities, and cyclicals like Transports and Industrials, what has come to be known as the “reflation trade.”

Major sectors since the bottom: reflation rules (since March 23, 2020)

• Russell 2000 up 126%
• Transports     up 108%
• Banks            up 107%
• Materials          up 93%
• Energy            up 91%
• Industrials       up 90% 

While Technology has also done well (up 85%), consumer sectors have greatly lagged the reflation trade because those stocks benefit less from the “reopening” of the economy.

Defensive sectors lag the recovery (from 3/23/20 low)

• Health Care         up 47%
• Consumer Staples up 32%
• Utilities                   up 30%

Still, looking at returns since the bottom shows an even bigger trade than reflation: call it the “rapid change trade.”

Investments in clean energy, online retail, lithium/batter, 3D printing, cyber security, have all exploded in the last year.

The “rapid change” trade? (from 3/23/20 low)

•  Clean Energy (PBW)   up 324%
• Online Retail (IBUY)     up 303%
• ARK Innovation (ARKK)  up 231%
• Lithium/Battery (LIT)        up 217%
• 3D Printing (PRNT)          up 166%

“Investors are betting that Covid is speeding up a tech transformation of the home and the workplace…so investing in change is definitely a theme,” said Murphy.

Still, it seems a bit strange. You have the old school energy, brick and mortar, and industrials all rallying, and at the same time you have the high-tech, more speculative “rapid change trade.”

Can you have both? “Over time, one will prevail over the other, but right now, circumstances are such that there is room for both,” Steve Sosnick from Interactive Brokers told me. ”Think of all the new investors that have come into the market in the last year. The new money has gone into that thematic tech.  That’s what happened in the late 1990s: a whole new crop of investors came in and were interested in tech.  The old school investors aren’t comfortable chasing that trend.”

Still, betting on everything speeding up also seems a safe bet for Jim Besaw, chief investment officer at GenTrust, who is one of many observers noting that the pace of change, the pace of trading, the pact of everything seems to have sped up in the last year: “Everything we previously believed would take months to happen now was going to happen in a matter of days/hours.”

What will Powell and Yellen say about the lessons learned from managing the Covid crisis?

While Sosnick expects a wide discussion about inequality and the K-shaped recovery, he also expects a vociferous defense of going big with stimulus: “The Republicans I think will argue going big was right in the beginning, but did we really need to ‘go big’ now, with this latest stimulus, when we are more likely closer to the end than the beginning?”

Cecchini, who is writing a book about the fiscal and monetary policy response to the pandemic, hopes Congress will push back on the increasingly aggressive behavior of the Fed during these crises. 

“There are situations where a coordinated fiscal and monetary response is warranted,” he said. 

“But if you are going to have these kinds of coordinated efforts in the future, there needs to be a more explicit involvement of Congress. There should be more oversight of the Fed when they resort to these kinds of big, broad programs.”