Market Overview

How The COVID-19 Drop Has Potentially Set Up 'Another Long Economic Expansion'

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How The COVID-19 Drop Has Potentially Set Up 'Another Long Economic Expansion'

The SPDR S&P 500 ETF Trust (NYSE: SPY) is up more than 40% off its March lows despite analysts anticipating a 43.5% decline in S&P 500 earnings in the second quarter.

On the surface, the recent rally may seem puzzling given the near-term hurdles the U.S. economy is facing, but Merk Investments analyst Nick Reece said Wednesday the last three months of gains may be just the beginning of another multi-year bull market.

Some traders have been concerned that the stock market’s resilience in the face of seemingly lackluster news in recent weeks is a sign of bubble-like behavior on the part of investors. However, Reece said skepticism is typically a bullish signal for investors.

“A market that doesn't go down as much as it ‘should’ on bad news may indicate a persistent underlying dominant force,” Reece said.

See Also: 2020 S&P 500 Recovery Rally 'Closely Tracking' 2009 Rebound

Tracking 2009: The stock market may be due for a correction following such a strong run in recent months, but Reece said the recovery is closely tracking the one in 2009 that marked the beginning of a decade-long bull market.

“While I think it’s likely we’ll see some downside volatility over the coming months, my base-case view is that we’re in an ongoing secular bull market that was interrupted by an exogenous shock crash and contraction,” Reece said.

He believes the coronavirus outbreak triggered a “painful economic reset” for the U.S., but it has also set the economy up for “another long economic expansion.” Unfortunately for investors, the stretched valuation of the market combined with the potential for an extended return to economic normalcy could mean subpar stock market returns over the next several years.

“Even if the secular bull market hypothesis is borne out, we still may see somewhat limited upside over the coming couple of years—perhaps analogous to the 1992-1994 period, in which earnings rose faster than the market (bringing the P/E ratio down),” he said.

Benzinga’s Take: Stocks have historically preferred to climb a “wall of worry,” and there seems to be plenty of fear on Wall Street these days. But if Reece is correct and the S&P 500 repeats its 1992-1994 pattern of earnings multiple contraction, gains could be fairly lackluster. During the three-year period from the beginning of 1992 to the end of 1994, the S&P 500 gained just 5.1% overall.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

Benzinga is covering every angle of how the coronavirus affects the financial world. For daily updates, sign up for our coronavirus newsletter.

 

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