U.S. Stock Market Rally

Parallels to Post-Recession Periods

There have been only two other scenarios when U.S. stocks climbed at such a rapid pace over a four-month period since World War II, with the recent rally showing strong parallels to both, according to a Deutsche Bank analyst.

Post-recession periods

"The last time we saw the S&P 500 advance this rapidly over four months was up to July 2020," when equities staged a "sharp recovery" after slumping due to the COVID-19 pandemic, said Henry Allen, macro strategist at Deutsche Bank. The mid-2020 rally was bolstered by significant monetary and fiscal stimulus, with the S&P 500 rising by 26.6% between April and July, nearly recovering to its pre-COVID peak, as per FactSet data.

Looking back, U.S. stocks also surged after hitting fresh lows in 2008 post the global financial crisis, with the index gaining over 25% in the four months leading to June 2009 once the crisis had passed.

"Inevitably, recessions trigger substantial equity selloffs; however, as the economy begins to recover, there's typically a rapid rebound for the stock market," Allen explained.

Echoes from the Dot-Com Bubble Era

The dot-com bubble era

The recent equity rally also evokes memories of the dot-com bubble over two decades ago when the S&P 500 soared by 26% in the four months until July 1997. This surge was succeeded by a bubble burst, resulting in stocks declining for three consecutive years from 2000 to 2002. S&P 500’s Breath at Record Highs

The renowned S&P 500 index has surged by an impressive 21.5% since hitting a low in October 2023, driven by the optimism surrounding the US economy's smooth recovery, anticipation of interest rate cuts from the Federal Reserve, and the prevailing investor excitement towards artificial intelligence.

A Rare Rally

According to Allen, such swift rallies are uncommon and typically occur when the economy emerges from a recession following a market downturn. He pointed out that historical observations post-World War II suggest that such rapid rallies occurred during recession recoveries, except during the dot-com bubble period.

Bubble Fears

Given their rarity, there are growing concerns that the current stock market rally might be a bubble in the making, echoing the cautionary tales from the dot-com era. Market participants are drawing parallels between the surge in the "Magnificent Seven" stocks, including tech giants like Nvidia Corp., and the tech-driven euphoria of the late 1990s.

Resilient Economy

Despite similarities to past scenarios of rapid gains, Allen refrained from directly comparing the current rally to previous market bubbles. Notably, the US economy has displayed remarkable resilience, even as the Federal Reserve has maintained interest rates at a 22-year high since July.

Market Performance

As of Monday afternoon, the three major US stock indexes showed mixed performance, with the S&P 500 and Nasdaq Composite building on their record highs with slight gains, while the Dow Jones Industrial Average experienced a slight decline, based on FactSet data.