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Why the 2020 Stock Market Rally Could Be Far From Over

Last Updated September 23, 2020 2:26 PM
Stephanie Bedard-Chateauneuf
Last Updated September 23, 2020 2:26 PM
  • The S&P 500 hit a record high amid a pandemic-fueled recession.
  • History tells us the market will be higher in one year.
  • One of the biggest threats to the stock market is a ‘W-shaped’ recovery.

The S&P 500 hit a new all-time high last week. It’s not the first time the stock market traded to an all-time while still in a recession. It happened four times before, during the recessions of 1961, 1980, 1982, and 1991.

In all of those cases, the stock market was up double digits 12 months later (except in 1980, where it was up 7.7% a year later).

stock market
The stock market rallied further one year later every time it hit a new all-time high during a recession. | Source: The Bahnsen Group 

If history repeats itself, the stock market could rally further in one year. An important point to note is that in the past, new all-time highs were hit either the same month the recession ended or one year later.

Between April and June, real GDP declined 32.9% from the previous quarter . It’s the largest quarterly drop on record for data dating back to 1947.

That follows a 5% drop in the first quarter, which only included the pandemic’s first weeks.

Goldman Sachs predicts that third-quarter GDP will jump a record 25%, as the economy benefits from states that were able to reopen. Even with this rebound, GDP would still end the year down 4.6%.

Although the U.S. recession is likely over, it’s much different than the others.

A Double-Dip Recession Is More Likely Than A V-Shaped Recovery

The recession may be technically over, but production is well below what it was earlier in the year, and growth may not be as fast. The decline in output has been so severe that it could take years to return to the activity levels we saw in late 2019. The pandemic impacted all parts of the economy.

The economy began to recover in May with the reopening of states, but its pace is now slowing. Consumer spending is waning as fiscal stimulus is running out. Business and household bankruptcies are starting to increase.

According to a recent survey by the Conference Board , among U.S. CEOs, 42% expect a U-shaped recovery–that is, a more moderate rebound–while 26% expect the dreaded L-shaped recovery. Another 23% expect a W-shaped recovery or a double-dip recession.

The economy could fall back into recession if growth stalls. Only 9% of U.S. CEOs expect a V-shaped recovery when an economy rebounds almost as quickly as it has contracted.

conference board
Among U.S. CEOs, 91% don’t expect a V-shaped recovery. | Source: FORTUNE 

Some economists even think that the U.S. could face a depression.

Mark Zandi, chief economist at Moody’s Analytics, said: 

The economy is starting to go sideways … without extra $600 unemployment insurance, more PPP, and help for state and local governments we’re going to go off a fiscal cliff. I think an effective vaccine is the necessary condition for getting the economy going again, the longer it takes the more likely we’re going back into recession or even worse: A depression.

The job market is telling us that the recovery will be a bumpy ride. Initial jobless claims rose above 1 million again for the week ended August 15, after two weeks of decline.

The Stock Market Will Have Trouble Rallying Further

The fact that the S&P 500 has recouped its losses from the pandemic reflects more the unprecedented actions taken by central bankers than the real economy’s strength. By lowering interest rates to zero and buying trillions of dollars in bonds, the Federal Reserve has prompted investors to bet on risky stocks.

The S&P 500, which includes some of the wealthiest and most powerful companies in the U.S., is up 4% year-to-date. But small businesses, less able to survive the pandemic, are lagging. The small-cap Russell 2000 is still down 7% for the year.

russell 2000, s&p 500
The Russell 2000 is lagging the S&P 500. | Source: Yahoo Finance 

Solita Marcelli, UBS Global Wealth Management’s Americas CIO, wrote in a note to clients: 

Markets are still skeptical about the durability of the economic recovery.

If we have a double-dip recession, the stock market will likely crash again. History might not repeat itself this time.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author holds no investment position in the above-mentioned securities.