A Societe Generale study of bear markets since 1870 showed that the
current bear-market rally is a departure from history. Andrew Lapthorne,
the firm's head of quant strategy, concluded that investors are taking
an early victory lap for the economy even after accounting for trillions
in stimulus spending. He expects the stock market to end the year
roughly 7% lower than current levels. Click here for more BI Prime
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April was the best month for stocks since 1987. But this stand-out
performance is not being universally cheered on Wall Street. The S&P
500's 13% ascent last month can be traced back to its bottom on March
23 — the same day the Federal Reserve essentially pledged to do whatever
it takes to support the economy during the coronavirus pandemic. Even
with this stimulus in action, investors declared an early victory for an
economy that must still crawl out of its worst contraction in many
decades, according to Andrew Lapthorne, the head of quantitative
strategy at Societe Generale. He drew this conclusion by studying a
150-year history of bear markets, defined as a 20% decline from recent
highs. “Beware of the oddity in this bear rally,” Lapthorne said in a
recent note to clients.
He added: “With the fallout from the complete shutdown of economic
life in terms of disruptions in supply chains and collapse of aggregate
demand, as well as the uncertainty on the post-lockdown path to
recovery, new market bottoms are possible, although the unprecedented
massive policy response could provide the backstop to a worsening case
of deflationary spiral.”His study of bear markets since 1870 led him to
conclude that the S&P 500 would finish the year at about 2,715,
representing a 7% decline from its April close.Both the crash and
recovery are abnormalLapthorne's analysis started by including episodes
since 1870 when the S&P 500's decline could ostensibly have been
rounded up to 20%. One recent example was the late-2018 sell-off that
winded up as a 19.6% decline.But because the 2020 drop has been a
different beast in terms of its speed, comparing it to every bear market
was not empirically ideal.
And so he filtered for severe bear markets, defined as drawdowns of at
least 30%, to make them comparable to this one. The roster of 15
meltdowns includes infamous sell-offs like the crash of 1929, Black
Monday, and the dotcom bust. He found that on average, the S&P 500
recovered by 4% within a month, 13% within three months, and 27% within a
year. The typical trajectory of recoveries is similar even when the
Great Depression, often likened to the coronavirus crisis, is
included.By comparison, stocks have leapt more than 30% from their
bottom in March.
The Wall