At this point, it looks certain the coronavirus (COVID-19) outbreak could trigger the first U.S. recession since 2008. However, the stock market is now reacting very differently today than it did in 2008.
On Sept. 29, 2008, the S&P 500 dropped 8.8%, its first drop of more than 5% in a single day during the financial crisis. Over the next 23 trading sessions, the S&P dropped another 13.8%.
On March 9, 2020, the S&P 500 experienced a similar 7.6% drop due to concerns about the negative economic impact of COVID-19. However, over the next 23 trading sessions, the S&P 500 has risen 0.5% overall.
DataTrek Research co-founder Nicholas Colas has been tracking the 2020 trading action and comparing it to the fall of 2008. For weeks, the 2020 market was trading in tandem with 2008, but it has broken out of that pattern in the last two weeks.
Colas said there are two reasons why the stocks are reacting differently to the current crisis than the one in 2020. First, Bernie Sanders dropping out of the presidential race has lowered the political risk of a major policy disruption in 2020. In the fall of 2020, the approach of the U.S. election was creating additional risk that a presidential transition would make policy decisions more difficult.
In addition to the political angle, Colas said the other major difference between 2008 and 2020 is an aggressive government stimulus. Congress has already passed an aggressive $2 trillion economic stimulus package. During the financial crisis, investors had to wait until February of 2009 before a much smaller stimulus package was passed. It’s not a coincidence that the stock market bottomed shortly thereafter on March 9.
Unfortunately, Colas said that just because the market has stabilized doesn’t mean there’s significant upside ahead like in 2009. The 10-year trailing earnings multiple for the S&P 500 dropped to 11 times back in 2009. Today, that earnings multiple is at 22 times, suggesting stocks are twice as expensive.
Colas warned investors about assuming that just because everyone knows first-quarter earnings season will be bad doesn’t mean there's no downside in the market. Colas said there is a clear 2008 analogy to the current situation.
“The analog week in 2008 was the 5 days around the US presidential election on Tuesday November 4th. Even though Barack Obama led in the polls (Gallup had him +9 points over McCain on November 3), the S&P 500 fell by 10% in the 2 sessions after Election Day,” he said.
Colas said he wouldn’t be surprised to see stocks run out of steam a bit this week after such a strong performance so far this month.
Just because the SPDR S&P 500 ETF Trust SPY has bounced significantly off its March lows doesn’t necessarily mean the sell-off is over and the stock market has bottomed.
For investors with at least a one-year investment horizon and high risk tolerance, Colas has been recommending investors buy at the close on each day the S&P 500 drops at least 5% in a single trading session.
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