2020’s return to record highs looks like historic market recoveries of the past


A pedestrian wearing a face mask watches a smartphone as he walks past the New York Stock Exchange (NYSE) in New York on Monday, July 20, 2020.Michael Nagle | Bloomberg | Getty Images

At some point in the wee hours, it is both late and early.For those who have been partying, dawn is a sign that things have gone far enough – or maybe too far. Of those who have gone to bed, the sunrise is a new beginning, offering the opportunity to get things done.

Which brings us to the current stock market setup.

The S&P 500 is up 50% on 100 trading days bringing it to the brink of a record high, making this rally the strongest in history and, by some interpretations, ending the market’s strongest bearish. short of all time. Based on some tactical, calendar and sentimental indicators, this powerful rebound appears mature and prone to slowing or retreating in the short term.

Yet the angle and speed of the market’s ascent also makes it most resemble the powerful moves out of the decisive and hallowed market funds of yore, those that launched long bull markets and signaled a lasting economic recovery. to come up. What to do with them?

Hesitation near the peaks

The market’s difficulty last week to break past the February S&P 500 closing peak at 3386, despite some attempts to play, is partly due to the numbers alone. At the very least, the gang had to absorb all the mechanical sales that came from the break-even traders and the profit-takers using it as a target and a way to not get too greedy.

Yet the market is getting to this point just as professional investors are showing more optimism and aggression in playing the positive role than we have seen since before the Covid shutdown crash. The frantic buying of option bets on the rise has brought the put-call ratio close to its lowest in several years.

The level of equity exposure of the tactical fund managers tracked by the National Association of Active Investment Managers has clicked above 100, a very high reading suggesting that the performance-driven pros are pretty much all-in.

Retail investors have been less willing to trust this rebound amid severe economic strains, but even here a net inflow of nearly $ 5 billion into domestic equity funds at the latest report was the highest in nine weeks.

Coming just as Apple is hitting the $ 2 trillion market cap and Tesla is soaring from the basically no-substance announcement of a 5-for-1 stock split, all of this suggests emerging complacency. which could make the rise more difficult and leave the large market poorly positioned for any unfavorable surprises.

Looks like big funds from the past

Yet from a broader perspective, market action – accompanied by an improvement in the pace of most economic measures – places the past few months in close alignment with some historical market recoveries.

Here, the S&P since the March 23 low is compared to the strong fund rallies of 1982 and 2009, and the resemblance is hard to ignore.

While the comparison has merit, the model shows that this rally is ahead of those previous instances, so no one should be shocked if progress stalls or the S&P corrects itself a bit soon.

But there is a debate worth having as to whether these historical examples are good precedents for today. The S&P 500’s 34% collapse in five weeks was less of a classic bear market than an event crash.

The sharpness and swiftness of the recession – and the immediacy of the overwhelming liquidity and fiscal response of the Federal Reserve and Congress – prevented the kind of purgative and grinding action typical bear markets have, which eliminates excess. and put valuations back down. Nor has there been the change in market leadership that usually occurs in the crucible of a bear market.

And, perhaps crucially, little of the previous bull market’s gains were disgorged.

Like 1987?

As this chart by Keith Lerner of SunTrust shows, the generational market lows – the ones that started lasting bull markets – came when the S&P 500’s annual 10-year returns were depressed. At the low of August 1982, the previous decade had produced total annual returns below 3% during the previous decade; in 2009, it was -4.5%. On March 23 of this year, the S&P was still up 9 and annualized since March 2010 – around the long-term average gain.

That could make the last episode a bit more of the 1987 crash – a dramatic and traumatic jerk after years of big gains.

The 87 break losses were recovered relatively quickly (although much slower than this year). This is when the Fed started conditioning investors to save the markets. And stocks did pretty well over the next couple of years before entering another slightly bearish phase, before resuming a nice uptrend – but not as strong as in 1982 or 09. (The recent comeback follows afterwards. also very closely related to the ultimately doomed rebound from the 1929 crash, by the way – a less encouraging parallel.)

This discussion is primarily about setting short and long term expectations, not about how to cripple prospects in a specific way.

While the rally arguably looks slightly ahead of itself, the underlying message from the strip is encouraging. The market has usefully widened in recent times beyond huge growth stocks to cyclical areas such as global industries, transportation stocks and housing-related names. So far, the S&P has deviated from negative seasonal trends in August. Business credit performed very well, with compressed borrowing costs supporting equities.

And as professional investors and a new cohort of novice-at-home traders move slightly toward overconfidence, the markets can certainly rise a bit, even if the crowds are showing off. And the Wall Street establishment and major retail investors are relatively cautious, partial compensation.

What if market force was a reaction to government authorities who modeled a way to bypass adverse economic feedback loops, protect against messy default cycles, and demonstrate the effectiveness and massive capacity of a support? aggressive budget? How many P / E points is that worth on the S&P 500 if investors can count on this kind of protection going forward?

So while most of the fun has likely been in the short term, and the push to a new high may initially represent a moment of culmination rather than continuation, investors should not rule out the possibility that it is not. so late in the grand scheme.


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