The 2020 comeback to record highs looks like leased markets of the past

At some point in the small hours, it is both late and early.

For those who have been partying hard, dawn is a signal that things have gone far enough – or maybe too far. Among the people who have lain low, sunbeam is a fresh start, offering the chance to get things done.

Which brings us to the current setting on the market.

The S&P 500 is up 50% after 100 trading days, taking it to the brink of a record high, making this rally the strongest in history and, by some interpretations, ending up at the shortest bear market ever. Based on some tactical, calendar and sentiment indicators, this powerful handball player looks mature and envious to wear or slip back in the short term.

The angle and speed of the rise of the market also make it most similar to the powerful movements of decisive and sacred substrates of the yore, the ones that unleash long bubble markets and indicate sustained economic excitement to come. What do I make of it?

The market’s difficulty last week to push above the S&P 500 closing peak level of 3386, despite a few game attempts, is partly explained by the numbers alone. If nothing else, the tape had to absorb whatever mechanical sales came from it, from traders locking in the break-even level and profiteers using it as a target and device to not get too greedy.

However, the market is coming at this point just as professional investors are showing more optimism and aggressiveness when playing upside down than we have seen since the Covid shutdown crash. Rampant purchase of bets on options options has extended the put-call ratio in the vicinity of multi-year lows.

The level of exposure to active of the tactical money managers, followed by the National Association of Active Investment Managers, clicked above 100, a greatly increased reading suggesting performance-oriented pros are roughly all-in.

Retail investors were less willing to trust this comeback rally in the face of severe economic stress, but even here a nearly $ 5 billion net inflow in household funds on the latest report was the highest in nine weeks.

Just as Apple was approaching the cusp of a $ 2 trillion market capitalization and Tesla re-advised on the fundamentally substance-free announcement of a 5-for-1 action split, everything suggests an emerging calm that is further easy upside difficult and troublesome could the broad market is not positioned for any negative surprise.

Yet from a broader angle, the market – accompanied by an improved cadence of most economic measures – has been putting the past few months in close alignment with some leased market experiences of the past.

Here, the S&P has been set against the strong meetings of the bottom of 1982 and 2009 since the low of March 23, and the likeness is hardly short-lived.

Even if the comparison is worthwhile, the pattern shows that this rally precedes those previous instances, so no one should be shocked if progress stagnates if the S&P corrects a bit quickly.

But there is a debate worth considering whether these historical specimens are a good priority for today. The five-week, 34% collapse in the S&P 500 was less of a classic bear mark than an event-driven crash.

The sharpness and speed of the downturn – and the immediacy of the Federal Reserve’s and congressional overwhelming liquidity and fiscal response – struck the kind of slippery, purgative action of typical bear markets, lowering overestimates and lowering valuations set. Nor was there the shift in market leadership that normally occurs in the crucible of a bear market.

And, perhaps crucially, not many of the gains from the previous bull market were wrong.

As this chart from SunTrust’s Keith Lerner shows, previous generations of generations in the market – those who launched long-standing bull markets – came when the 10-year lagging annual return for the S&P 500 became depressing. At the bottom of August 1982, the previous decade had yielded annual total returns below 3% in the previous decade; in 2009 it was -4.5%. On March 23 this year, the S&P was still up 9 & yearly since March 2010 – rounding the long-term average profit.

This could make the last episode a little more than the 1987 crash – a dramatic and traumatic disruption after years of strong gains.

The losses of the ’87 break were recovered relatively quickly (though much less rapidly than this year). That was the moment the Fed began investing with investors that would save the market. And stocks did pretty well for the next few years before hitting another mild breeze, before setting a nice uptrend again – just not as strong as from ’82 or ’09. (The recent comeback also follows fairly closely with the ultimately condemned rebound from the 1929 crash, incidentally – a less hopeful parallel.)

This discussion is mostly about setting expectations in the short and long term, and not a means to narrow the perspective in a precise way.

Even if the rally apparently appears a bit to itself, the underlying message of the tape is encouraging. The market has recently expanded exponentially beyond large growth stocks to cycling areas such as global industry, transportation stocks and housing names. The S&P has so far removed negative seasonal trends in August. Corporate credit has performed very well, with compressed borrowing costs supporting stocks.

And while professional investors and a new cohort of traders with beginner-at-home edge may be overconfident, markets can certainly trend a bit on their own, while showing in-audience swagger. And the Wall Street establishment and core retail investors are relatively cautious, partly offset.

And what if the strength of the market is a reaction to government authorities proving a one-way model for negative short circuits for economic feedback, cushioning oppressive standard cycles and proving the effectiveness and massive capacity for aggressive fiscal support? How many P / E points is that worth on the S&P 500 if investors can count on that kind of protection in the future?

So while most of the fun has probably been in the short term, and the pressure to reach a new height 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.