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Stocks just did something that’s only been seen four times since World War II, and it’s both an achievement and a warning about what might be next for markets.
Analysts at Deutsche Bank said the rally in the S&P 500 in April and May has been historic. In those two months alone, the index surged 16%. Such a gain in that span is exceedingly rare, happening four times since 1945.
But that could also be an omen for investors. In three of those instances — which include the stock rallies that followed the COVID-19 shock, the Great Financial Crisis, and the first oil shock of the 1970s — the US was coming out of a recession, meaning much of the increase was fueled by the recovery and a renewal of animal spirits in the market.
The fourth instance, however, was January and February 1987, which preceded the Black Monday crash that took the S&P 500 down more than 20% in a single day.
“Given today’s rally hasn’t followed a recession, it’s pretty striking that the only non-recession example since WWII of the S&P 500 rising this fast was a few months before a historic market crash,” the bank’s Henry Allen wrote on Tuesday.
Talk of a stock correction has been rising as the rally has picked up momentum. Deutsche flagged it as one of big “dislocations” it’s seeing in markets right now, as stocks keep rising against a tide of bearish geopolitical and economic news as the Iran war drags on.
Besides the S&P 500 rally, Deutsche said it sees other dislocations. Allen pointed to the risk that the Fed will lean more hawkish as inflation becomes a bigger concern.
“That’s a striking feature too, given that Fed hawkishness has been correlated with several multi-asset selloffs of recent years, including 2015-16, late-2018, and 2022,” he added.
The bank also pointed to signs of stress in the US Treasury market, as well as the fact that oil prices looked “remarkably contained” despite the Strait of Hormuz being closed for longer than investors had initially anticipated.
