Wall Street analysts are warning that US stock markets have rallied too far, too fast since a brutal sell-off earlier this year.
The S&P 500 has been on a tear. The large-cap US equity benchmark fell into a bear market in mid-March as the coronavirus pandemic swept across the globe — but has since risen more than 25 per cent even as the full economic impact from the crisis becomes clearer.
Strategists at French investment bank Société Générale have crunched through the past 150 years of bear markets, which are typically defined as a 20 per cent fall from a recent peak. They conclude that this rally “appears at odds with bear rallies in market history”.
Their research shows that recoveries have typically been gradual, with frequent blips along the way as a crisis plays out.
“The ascent of markets from bear-market bottoms has never been a sprint to the top,” said Solomon Tadesse, the bank’s head of quantitative equities strategy for North America.
Under the team’s most conservative scenario, the S&P 500 would end the year about 7 to 8 per cent lower than its current levels.
But others in the market think that this rebound is truly without precedent, pointing to radical central-bank interventions that have supported stocks and arguing that the slowdown is the result of moves to shut down economies that should be unwound over coming months.
“This is a policy-induced downturn, and the speed and structure of the recovery could follow a different route from previous downturns,” Paul Donovan, UBS Wealth Management’s chief economist, said in a note last week.