2020 S&P 500 Recovery Rally 'Closely Tracking' 2009 Rebound

The historic stock market rally off the 2020 March lows continued on Tuesday, with the SPDR S&P 500 ETF Trust SPY trading higher by 2.3%.

It may seem like the recent market trading action is unprecedented, but DataTrek Research co-founder Nicholas Colas said it's actually “closely tracking” the market’s 2009 bounce off of the March 9 lows.

In fact, 58 days after the March 23 lows, the S&P 500 is up about 37%, almost perfectly in-line with the 39% index gain 58 days after the March 9, 2009 low. Unfortunately, if the S&P 500 continues to track its 2009 rebound, Colas said investors can anticipate about seven weeks of high volatility and very little overall gains.

Key Differences: Colas warned investors that the S&P 500 index is a lot different than it was back in 2009, and the current economic situation is different as well. First, the S&P 500 is currently trading at around 19.6 times recent peak earnings compared to 10.4 times trailing peak earnings at the same point in 2009.

“Markets now are not just discounting a speedy return to prior high levels of corporate earnings, but also that these cash flows will be more sustainable than prior cycles,” Colas said.

In addition, S&P 500 weightings have shifted dramatically in the past 11 years. At this point in 2009, tech stocks had an 18.4% weighting in the S&P 500 and energy stocks had a 12.4% weighting. Today, tech stocks have a 32% weighting, and energy stocks are down to just 3%.

Colas said tech earnings and cash flows are more sustainable than energy earnings, which helps in part to explain today’s relatively high market valuation.

Finally, the financial sector more than doubled from March 9, 2009 to June 1, 2009 as part of a relief rally as fears over the collapse of the global financial system subsided. This time around, the financial sector is up just 35% from March lows.

What’s Next? Despite the differences, Colas says the most likely scenario is that the S&P 500 will continue to track the 2009 recovery rather closely. Despite the fact that the next seven weeks could be underwhelming for investors, Colas said the S&P 500 rallied 17% from late July 2009 through the end of the year.

“If history repeats itself, that would put the S&P at 3,588 on December 31st, for an 11.1% price gain on the year,” Colas said.

Benzinga’s Take: Given the economic shutdown, a spike in unemployment and the potential for a second wave of COVID-19 infections, it may seem like stocks have rallied too hard too fast from the March lows. However, economic conditions certainly weren’t spectacular in June of 2009 either, yet expectations for a long-term recovery continued to push stock prices higher through the end of the year.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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