The current state of play in stocks reminds Morgan Stanley’s Michael Wilson of March 2009, the turning point for shares after the 2008 financial crisis wipeout. So his outlook is bullish. Of course, unlike the 2007-09 bear run, the 2020 version went by in a blink.
Aside from bear market length, there are a lot of similarities. “Markets are tracking the Great Financial Crisis period very closely in many ways,” wrote Wilson, the firm’s US equity strategy head, in a note to clients. Just as in 2009, when stocks embarked on history’s longest bull market, they began a rebound this past March. Duration of recent slide: one month.
The bear market that accompanied the Great Recession was a lot longer than the current one. Last time, the air started going out of stocks in late 2007, and they really sank when the crisis hit in September 2008 and kept diving until the following March. Duration: 17 months.
Lately, things are happening very fast. The recent bear market began after stocks peaked Feb. 19 and went on to lose 34% (the technical definition of a bear market is a drop of at least 20% from the high point), until March 23. Then, as Congress passed a $2.2 trillion rescue program for the virus-whacked economy, the market roared back, gaining some 30%, and it’s now within hailing distance of its apex.
Wilson checks off the many resemblances between then and now. The equity risk premium, of around 7 percentage points, is a near match, for instance. That’s the expected earnings yield—the inverse of the price/earnings ratio—for the S&P 500 minus the 10-year Treasury’s yield. The risk premium indicates how much additional return stocks garner over safe Treasury bonds’ performance.
Still, there are some significant differences in the components of the equity risk premium between today and 11 years ago: Both the earnings yield (7.7%) and the 10-year yield (0.7%) are lower nowadays (in 2009, they were 9.5% and 2.5%, respectively). Still, in Wilson’s eyes, the relationship between the two numbers in each year tells essentially the same tale. Namely, bluer skies ahead for stocks.
Wilson’s note displayed little patience for those who argue that the current rally is powered by a handful of tech darlings (Facebook, Amazon, etc.). He pointed to the outperformance of small-cap stocks during this spring rally, plus a rising percentage of stocks exceeding the 200-day moving average, as evidence that the upward move has breadth going for it, a good sign of stamina.
In a contrarian stance, Wilson believes interest rates will rise with an economy that will grow again, due to Washington’s coronavirus relief and a re-opening of US business. The conventional expectation is for low rates for a long time (the Federal Reserve has pegged short-term rates near zero). And climbing rates, the standard reasoning goes, are good for stocks, as bonds with their skimpy payouts are no competition. But Wilson thinks rising yields are the telltales of a growing economy and that condition is ripe for stocks.
And that would leave the 2020 bear market as the shortest in history. The record before was held by the 1990 bear, when it took only took three months to go from peak to trough, then began climbing again. The average bear market lasts 21 months.