U.S. Stock Market Indices Remain Well Bid Despite Higher Yields

One year after the COVID-19 pandemic started, and the stock market indices in the United States had one of their best ever performances. Naturally, the U.S. indices led the way up, normal behavior for the largest equity market in the world. 

Other indices in the developed world followed suit, although not at a similar pace. The Japanese and European indices bounced strongly from the lows, and some of them reached all-time highs. However, nothing compared to what happened in the United States.

Now that the vaccination pace in the United States points to a rapid economic reopening, the big question is – what will the stock market do? One thing is sure – the median S&P5009 stock short interest as a percentage of market capitalization is at the lowest level in more than two decades.

In other words, betting against the stock market is dangerous, despite many voices arguing the opposite. Yet, as long as the main indices are just a tad lower from all-time highs, it is difficult to build a bearish case – and expensive as well (SPX, SPY).

Stellar 12-Month Returns for the S&P 500 Index

The best way to understand the impressive returns on the S&P 500 during the pandemic year is to use a normal distribution of its yearly returns. According to the characteristics of such a distribution, 60% of returns should fall within one standard deviation from the mean, 95% within two standard deviations, and 99% within three standard deviations from the mean.

As the chart above shows, the S&P 500 has gained 76% since it bottomed in 2020. This is by far the largest one-year trailing return in the history of the S&P 500 index, scaring many investors about what is to come.

Truth be said, warning signs for the stock market bulls appeared on the horizon. First, rising 10y and 30y Treasury yields in the last seven weeks pose some challenges to the bullish theses. In the past, spans that long led to a decline in the stock market.

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Disclaimer: None of the content in this article should be viewed as investment advice or a recommendation to buy or sell. Past performance/statistics may not necessarily reflect future ...

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