Will S&P 500 Recover To Its Previous Peak?

We’ve been getting grim economic data since the beginning of March. Economically speaking, things don’t look pretty. Nonetheless, the S&P 500 is largely standing its ground, steadily recovering from the March 23rd lows around 2200 back to almost 3000 today, with 2730 having provided support over the past three weeks. Some analysts believe we are enjoying a V-shaped recovery and that we will soon go back to the benchmark’s previous peak around 3400.

I’ve been in the business for a long time not to be skeptical, and to believe in fast recoveries, especially after COVID-19 crippled global economies around the world like I’ve never seen before, in addition to all the ambiguity surrounding the economic consequences of the outbreak. Kenneth Rogoff, a Harvard University professor said: “A global recession seems baked in a cake at this point with odds over 90%.”

The first time I truly believed in a fabulous V-shaped rally was back in May 2000, following a swift recovery of the Nasdaq composite after the index crashed from a closing high of 5048 to almost 3000 in what is today known as the dotcom bubble. Out of fear of missing out (FOMO), I bought back the stocks that I had happily sold a few months before at a hefty profit. It felt like a lifetime opportunity, to now buy back the same shares 40% lower. But guess what happened next?

We all like visuals, so here’s a nice illustration:


Needless to mention that my hefty profits evaporated, and in addition I was now down an extra 35% on my portfolio.

Some experts say that this time is different. Back then, earnings were not driving the markets, dreams and greed were. Most dot-coms were burning cash and selling us the dream of a “new economy”. The NASDAQ had dropped 2000 points! "Now is the time to pick stocks at a bargain before it’s too late", they said. I thought I was going to miss the train. Well, the train was skidding on a slope, and the brutal slide downwards was going to last until October 2002.

But today, the experts are right about one thing. Back then the US equity market’s cap-to-GDP ratio was at an all-time high. Some companies were trading at astronomical valuations without any earnings growth. What about today? According to some analysts, a sizeable market correction was due even before the coronavirus outbreak, as some stocks were overpriced, and readjustment was needed to rebalance. The outbreak was just the spark that ignited the fire.

More importantly, let’s think about the corona aftermath for a second. You don’t have to be a University professor to know that immediately following lockdown easing measures, our lifestyle is not going to go back to the way it was. We are not going to plan a vacation abroad, we will think twice before going to the cinema, to a concert, or to a jazz festival. These are unprecedented times that have impacted our consumption behavior and changed the way we interact with others. We all have to rethink the way we eat, the way we shop, the way we work, and the way we connect. Not to mention unemployment numbers that have increased to record highs in most countries and obviously jobs are linked to consumer spending.

Sure, to stabilize the markets as well as economic activity, central banks around the world decided the intervene in various ways to provide the needed financial support, taking drastic action not seen since the Great Financial Crisis, boosting confidence and reducing fears of the looming global recession.

However, the injection of trillions into the economy creates another risk that has not received much attention: inflation.

To summarize: inflation, unemployment, deeper negatives in the very near term, but also certain change in consumer behavior raising the specter of more adverse second-round effects on income and spending in the medium to long term. Therefore, even if manufacturing recovers and reopens quicker than other sectors, does that mean that consumption will go back to normal? How quickly will sectors such as tourism and travel recover?

Goldman Sachs has recently revised its view on how this unprecedented outbreak will impact the U.S. economy, seeing a sharper downturn than originally thought. Among its expectations are that the unemployment rate will peak at around 16% later this year, well above original expectations for 9%. GDP is forecast to fall a stunning 34% in Q2 and that would be by far the worst period since World War II.

A few days ago, the GDP report showed that the U.S. economy shrank at its fastest pace since the last recession, contracting at an annual rate of 4.8% in Q1. However, the market brushed this off, and the S&P500 rallied almost 80 points to close at 2950 on that same day.

There is no doubt that economies will recover. They always do no matter what. "Never bet against America" - Warren Buffet says. The question however is, how long it will take for unemployment and consumer behavior to recover? We all know that we will definitely be poorer when coronavirus is gone. We know that GDP is plunging around the world. We also know that there will be a towering pile of debt from the bills run up during this crisis. When it is over, we will have to figure out how to repay these bills right? The scale of the challenge is huge. According to the IMF, the debt ratio of the average advanced economy will exceed 120% next year.

What’s happening today in the markets is trading on speculation of bending the COVID-19 curve. And that’s fine. However, isn’t it wise to think of the massive economic shock that we will have to deal with once the immediate crisis has passed? This is the awesome dilemma we will face in the aftermath of COVID-19. This is the battle for which we must all be prepared. After the financial crisis of 2007-08, it was in 2010 that the push for belt-tightening began. And after the dotcom bubble, it took the market 5 years to recover to its previous peak.