So, what should investors expect from the S&P 500 post major crash performance?
Based on the latest COVID-19 crash, for example, the S&P 500 bounced back 47% in just five months, despite lagging economic growth and historic unemployment levels.
In the next few months, we will know whether this was a typical bear market rally sparked by massive central bank currency creation to buy assets and keep prices inflated, known as qualitative easing.
“Based on the latest COVID-19 crash, for example, the S&P 500 bounced back 47% in just five months”
S&P 500 post major crash performance tends to be a V-shaped recovery in stock prices spurred on by the central bank’s stimulus policies
Put in a few words, the COVID-19 crash recovery in stocks was driven by a blowout in the Fed’s balance sheet of more than one trillion dollars of asset purchases. Moreover, speculators piled in anticipation of the Fed’s QE max policy. So as the fundamentals meltdown, stocks melted up fueled on central bank liquidity.
What about the S&P 500 post major crash performance in other major crashes?
Following Black Tuesday in 1929, the US stock market took 7,256 days, approximately 25 years to fully recover from peak to peak. In response to the market crisis, a coalition of banks bought blocks of shares, but with negligible effects. Then investors scrambled for the exit. Meanwhile, the Federal Reserve Board rose the discount lending rate to 6%. But that increased the borrowing costs for consumers, businesses, and the central banks themselves.
“COVID-19 crash recovery in stocks was driven by a blowout in the Fed’s balance sheet of more than one trillion dollars of asset purchases”
So, the tightening of rates led to the economy contracting into the Great Depression.
Massive Fiscal spending didn’t get the economy out of a deflationary depression either. The economy boomed again in the post-WWII era, which led to the booming 50s and the beginning of US hegemony.
“1987, the Black Monday crash resulted in Federal Reserve chairman Alan Greenspan aggressively slashed interest rates. The S&P took under two years to recover” – Win Investing
What about the S&P 500 post major crash performance during the 1973 Nixon shock, OPEC oil embargo?
The Nixon administration responded with a series of economic measures in response to high inflation. Soaring inflation devastated stocks and consuming real returns on capital. Around the same time, the oil embargo also occurred, with OPEC member countries halting oil exports to the US and its allies, causing a severe spike in oil prices. It took seven years for the S&P 500 to return to its previous peak.
1987, the Black Monday crash resulted in Federal Reserve chairman Alan Greenspan aggressively slashed interest rates. The S&P took under two years to recover.
Moreover, in an attempt to deflate the 2000 Dot Com bubble the Fed raised rates five times in eight months, sending the markets into a tailspin. Virtually $5 trillion in market value evaporated. Amazon’s stock price cratered from $107 to $11
S&P 500 post major crash performance in the 2008 financial crisis, a subprime mortgage crisis triggered several interest rates cuts
Interest rates were brought down to historical levels and $498 billion in bailouts were injected into the financial system. Crisis-related bailouts extended to Fannie Mae and Freddie Mac, the Troubled Asset Relief Program (TARP), the Federal Housing Administration, and others.
But the S&P 500 post major crash performance in the 2020 COVID-19 crash, a 47% bounce back from the lows, could be deceptive
The economy is mirroring Great Depression-level unemployment numbers, reaching 14.7%, which doesn’t jive with 47% bounce back in stock prices. What ‘smore, the disconnect between the market and the broader economy could soon play out in another crash.