Let me start this post by disclosing that I am mainly a long-term investor and therefore remain long equities (individual names, mostly US large caps concentrated in tech and consumer / defensive names). However, I sold all credit funds (high yield bonds and leveraged loans) and some ETF positions in the FTSE and STOXX 600 in early / mid-March. I am disclosing this upfront so you can consider my bias as you read this post. We ended the first quarter of 2020 yesterday with the Dow Jones down 23.2%, the S&P 500 down 20.0% and the NASDAQ down 14.2%. Small stocks really got hammered, with the Russell 2000 down over 30%. That’s a horrible quarter for investors in US stocks across the board. The table below has returns for the major indices for 1Q2020, compared to the first quarters of 2018 and 2019.
U.S. stocks have increased steadily from March 2009 to the end of 2019 - over 10 years - with only a few interruptions. Over this 130 month period, the S&P 500 was down 40 months (month over month), but was only down two consecutive months or more only on eight separate occasions. From its trough on March 9, 2009 to its peak on February 12, 2020, the S&P 500 index increased fivefold, from 676.5 to 3,379.4. The average return/annum was 15.8% over this period. To provide some context, the return on the S&P 500 for the last 30 years has averaged 8.1%/annum. The return on the S&P 500 for the last 10 years looks abnormally high, certainly when it is viewed in a historical context. However, one must remember that there are structural and productivity changes in the economy that have occurred during this period, but most importantly, unprecedented accommodative monetary policy and some unusual fiscal policy stimulus (the Trump tax cut during an expansion) that have provided fuel for the rally to continue. As stocks rose throughout much of 2019 and then started 2020 with a bang, discussions were rampant on the market being overly valued, at least when viewed from the perspective of the P/E ratio and considering the fact that earnings growth had been slowing for several quarters running. But is 20% down – where we ended the 1Q2020 yesterday - unusual for a bear market, noting that the S&P was down 33.8% on March 23, it’s lowest close so far this year? History shows this is far from certain. The table below shows several S&P 500 downturns since 1987, providing peak-to-trough levels and bounces during the period (measured month over month). I have also included the Schiller P/E for each peak and each trough.
This table includes several recessions that I have shaded – the “Great Recession” (2007-2009), the recession caused by the “dot.com bust” and 9/11 terrorist attacks (2001), and the early 1990s recession. The current downturn is also shaded as the U.S. and much of the world are technically, if not officially, in a recession. The fact though is that we have never had a recession during which such a significant amount of economic activity has come to a grinding halt. As a result, I think we will retest the lows, and that this recent market rally reflects false hope at the moment.
People will receive their quarterly brokerage or 401k statements soon because we have reached quarter end, and the economic data is going to be shockingly bad even though expectations are being managed down. COVID-19 has not run its course, and pretending the end is in sight is false optimism.
We will of course get through this eventually and - gradually - business will return to normal. Until then, the market is rallying on false hopes and I simply don’t buy it. Of course, I have been wrong many times before!