Why the 2020 Stock Market Rally Could Be Far From Over

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). 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.

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

Why the 2020 Stock Market Rally Could Be Far From Over, CCN, Aug 24