S&P 500 Notes On A “Bear Market Rally” – 04-22-20

Is the bull market back, or is this still just a “bear market” rally? That is the question all investors want to know given the impressive rally from the March 23rd lows.

As David Rosenberg recently noted:

“Bear market rally: It’s a big bounce, indeed, but that is what it is. A rally in the context of a bear market that began on February 19th. The fact that we are coming off the best two weeks for the Dow (+15.2%) since 1938 (a huge recession within the Great Depression) just about tells you all you need to know.”

Here was a chart from an upcoming post on Russell Napier’s “Anatomy Of A Bear:” While stocks can indeed rally on “good news,” and stimulus, ultimately “bear markets” are complete when the real economy begins to recover.

However, as David notes, participation by the real economy is missing.

“The market has certainly “ripped” off the March lows but there is still quite a bit of pain out there. The Russell 2000 index has only recouped one-third of its loss and is down 28% from the peak.”

The ratio of the Russell 2000 to the S&P 500 tells you all you need to know.

Is the bear market over?

“For all intents and purposes, the bear market is intact, even after the S&P 500 equal-weight index has staged a half-way comeback, it is down 21% from the February highs.

I recommend a read of the FT column titled Mind the Gap Between the Markets and the Real Economy. That’s the view from the stock market lens. A very bipolar market with several key segments still deeply injured.There is no durable rally you can count on without the banks participating, that much I do know. Not to mention the small-caps being the true leading economic indicator and they remain ensnared in a bear market; too many people are getting fooled by the mega-cap growth stocks (with a dominant 22% share of the market cap) carrying the S&P 500 on its shoulders.”

The smoothed CAPE multiple at 25.9x in April — expanding from 24.9x in March! — which compares with 24.0x in January 2008, the first month of the Great Recession twelve years ago. We had a 26.0x multiple on our hands, as an example, back at the end of 2015. You see, that is a multiple you can pay if you are assured that the economy will be expanding, as it did then and the next year at a 2% pace. But that is not the case today. And you can’t simply say ignore 2020 earnings so conveniently when the whole future profits trajectory has been semi-permanently impaired in so many industries that COVID-19 has affected.

We are into an epic 40% down quarter on GDP and with no visibility which is why a growing list of firms are pulling their guidance. The CAPE multiple peaked in January at 31.0x, shrunk to 24.9x in March and is back to 25.9x.

Let me just say, for the record, that we have never seen a bear market end with a smoothed P/E multiple as rich as 24.9x — the highest trough multiple was 21.2x back in that 2000-2003 tech wreck bear market. The average trough in the 8-recessionary bear markets back to 1960 is 12.8x and the median is 13.5x. In the Great Recession it bottomed at 13.3x and in the Great Depression, the low in the multiple was 5.6x. Oh yes — the multiple hits bottom late in the bear market, not early, and we know for a fact that this one is just getting going. And no — it never is a straight-line down. Just don’t get caught in the waterfall, is all I am saying.”

Yes, it has been a super sharp, Fed-confidence fueled rally from the lows. 

Is the long-term bottom in? Maybe. But it will be best to wait and see, and know for sure.

When the real bottom is in, there will be years of a bull market ahead of us to participate in. 

In the meantime, the markets just registered a short-term “SELL” from fairly overbought conditions. 

It will pay to remain cautious for now.