By Matthew
Klein | Tuesday, April 7
So Close. U.S. stocks
started the day strong, up roughly 4%, only to end the day down about 0.2%.
Hopes about the trajectory of the novel coronavirus -- based on data from
yesterday -- were dashed by new data released this afternoon.
Oil prices fared even worse, with the price of a barrel of West Texas
Intermediate down 9.4%, to $23.63 a barrel.
My colleagues
at the Dow Jones market data group note that if U.S. equities had
done just a bit better today, we would have been back in a bull market. As
things currently stand, the S&P 500 index has gained almost 19% in the space of 11
trading days. Technically, the Dow Jones
Industrial Average already started a new bull market after it
soared 21% in three days in late March.
The new
S&P 500 bull market could be official with a decent day tomorrow. The
magic threshold is 2,684.88, less than 1% above today’s closing price of
2,659.41.
But let’s
leave aside the numerical thresholds of “bull market" and "bear
market," which are traditionally defined by 20% moves from market
peaks and troughs. The bigger point is that the historical record for
these sorts of situations is not particularly encouraging. The shortest bear
market of all time was in November 1929. Two of the shortest bear markets were
both in 1931. The two fastest transitions from the bottom of a bear to the
start of a “bull” market were in October 1931 and November 1929. These were not
buying signals, but brief interruptions in a much longer decline in stock
prices. Traders call them “dead cat bounces.”
Admittedly,
there is one positive precedent. March 23, 2009 marked the end of the
third-shortest bear market of all time (20 days). U.S. stock prices roughly
quadrupled between then and the most recent peak.
Sadly, that
encouraging example may not be particularly relevant today. One obvious
difference is valuation. In March 2009, the cyclically adjusted price/earnings ratio
(after accounting for changes in dividend and buyback policies) of the S&P
500 was under 15, as calculated by Professor Robert
Shiller. Now, that ratio is around 27. For
perspective, the price of U.S. stocks been about 23 times cyclically adjusted
earnings on average since 1960.
So while U.S. stocks were on
sale at a steep discount in March 2009, they are currently still trading at a
modest premium. That limits the potential upside for investors. It’s hard to
make money from the end of a disaster when the markets are already pricing in
normalcy.
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