EDITOR NOTE: With the S&P 500 and the Nasdaq notching record highs, the Dow Jones, trailing slightly behind, 2020 saw the shortest bear market in history. But are we due for a “double dip” recession in the next twelve months? If the coronavirus stimulus helped the US recover from the last bear, it appears likely that in order to sustain the current rally, we need a second stimulus. Meanwhile, millions of Americans remain unemployed, and the labor department estimates that the new jobs we’ll be adding in the next ten years will be a mere fraction of what we had lost in the last six months. The fundamental factors driving the bull market don’t seem to be present as stock valuations continue to move sky high.
Although August is historically a sleepy month for stocks, over the past four weeks the market has enjoyed an extraordinary run, hitting several new record highs—but historical data shows that the next few months could prove problematic for investors.
This month’s gains have pushed the stock market to record levels, officially ending the 2020 bear market and starting a new bull market. August’s blowout rally saw the S&P 500 and Dow Jones Industrial Average both fully recover their losses amid the coronavirus pandemic. Since the market’s sharp rebound from its March 23 low point, the Dow and S&P are both up more than 55%.
The more than 35% gain for the S&P 500 since April is the strongest five-month run for the index since 1938, according to data from Bespoke Investment Group.
A double-dip recession in early 2021 is still “more possible than most people realize,” says Essaye. “The U.S. is not out of the woods economically until mid-2021, I think.”
While all of the major indexes saw solid gains in August, the driving factors behind the market rally have been the same ones powering the tape for months, says Vital Knowledge founder Adam Crisafulli. “While fundamental conditions are much better than they were back in March and April, multiple expansions (not higher earnings estimates) is still accounting for the bulk of the market’s advance,” he says.
WHAT TO WATCH FOR
Stimulus, especially the historic level of support from the Federal Reserve, “has supported the initial phase of the road to recovery, but the fiscal stalemate in Washington puts the economic recovery at a crossroad,” says Charlie Ripley, senior investment strategist for Allianz Investment Management. Another coronavirus stimulus bill was expected in mid-August, but lawmakers in Congress have been deadlocked for weeks over the size and provisions of the next relief package. An agreement now looks unlikely until at least late September.
Originally posted on Forbes