Record-high prices is no reason to dump stocks: Morning Brief

Sam Ro

·Contributor

Updated Fri, Aug 21, 2020, 3:04 AM5 min read

In this article:

Friday, August 21, 2020

Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET.

Subscribe

What’s next for the all-time high stock market

The S&P 500 (^GSPC) set a new record high this week for the first time since Feb. 19, surging an eye-popping 51% from its March 23 closing low of 2,237 to a closing high of 3,389 on Tuesday. This represents the shortest bear market and third fastest bear-market recovery ever.

And Wall Street’s top stock market forecasters think there could be more gains ahead.

“Reaching a record high in stocks is no obstacle to further gains,” UBS’s Mark Haefele said. “Since 1960, one-year returns after the S&P 500 has hit a high have been 11.8%, slightly greater than the 11.3% when the market is below an all-time high.”

Similarly, LPL Financial’s Ryan Detrick looked at the history for comparable stock market runs.

“One, three, six, and 12 months after the first new high in more than five months show stronger performance than average or after any new highs,” Detrick observed. “Yet another reason to think that this bull market from a long-term point of view could have some more tricks up its sleeve.”

This comes as the economy remains in pretty bad shape. Just yesterday, we learned initial jobless claims unexpectedly ticked up above a million once again, ending a four-week streak of declines.

But remember, the stock market is a leading indicator, meaning prices largely reflect what’s expected to come and less so what’s already happened. And what we’re witnessing isn’t unprecedented.

“[W]e found there were four other times the S&P 500 made a new high during a recession: In February ’61, July ’80, November ’82, and March ’91,” Detrick said. “Incredibly, a new expansion started the following month every single time. Could stocks at new highs be signaling an end to this recession? We think that very well could be the case again this time.”

Keep in mind that recessions don’t end when things are great. They end when things stop getting worse. Remember that because, as we noted earlier, stocks are a leading indicator.

With regard to historical comparisons, Datatrek’s Nick Colas considered 2009, the year when the prior bull market began in the depths of the global financial crisis.

“The match is eerily close, and 105 days from the 2009/2020 lows the S&P is just slightly better (2 points) than back in 2009 on the same trading day,” Colas observed.

“If you’re bullish, the fact that the 2009 experience points to a further 11% gain between now and year end is welcomed news,” Colas added.

Obviously, 2009 and 2020 are very different. Colas notes that in 2009, financials led the way. Today, it’s tech. Back then, a new U.S. president was just put into office. This year, that seat is up for grabs.

In both instances, fiscal and monetary policy was very aggressive.

“Ultimately the 2009 – 2020 comparison is a reminder that 1) bottoms occur when government policy responses match the scope of an economic downturn and 2) the nature of the market’s recovery will vary by sector, but the aggregate return (driven by a sharp earnings rebound) is closer than one would think likely,” Colas said.

Should the market continue to follow the 2009 path, the S&P 500 could end the year close to 3,800. That makes Goldman Sachs’ recently updated bullish 3,600 target seem modest.

Getting to 3,800 would be surprising. But, what else would you expect from 2020.

By Sam Ro, managing editor. Follow him at @SamRo

What to watch today

Economy

9:45 a.m. ET: Markit US Manufacturing PMI, August preliminary (52.0 expected, 50.9 in July)
9:45 a.m. ET: Markit US Services PMI, August preliminary (50.8 expected, 50.0 in July)
9:45 a.m. ET: Markit US Composite PMI, August preliminary (50.3 in July)
10:00 a.m. ET Existing home sales, July. (5.41 million expected, 4.72 million in June)

Earnings

Pre-market

6:45 a.m. ET: Deere (DE) is expected to report adjusted earnings of $1.24 per share on revenue of $6.65 billion
6:45 a.m. ET: FootLocker (FL) is expected to report adjusted earnings of 54 cents per share on revenue of $1.97 billion
6:30 a.m. ET: Pinduoduo (PDD) is expected to report an adjusted loss of 1.45 yuan per share on revenue of 12.15 billion yuan