Our Head of Corporate Credit Research analyzes the market
response to President Trump’s tariff reversal and explains why
rallies do not always indicate an improvement in the overall
environment.
Read more insights from Morgan Stanley.
---- Transcript -----
Welcome to Thoughts on the Market. I'm Andrew Sheets, head of
Corporate Credit Research at Morgan Stanley. Today I’m going to
talk about the historic gains we saw this week in markets, and
what they may or may not tell us.
It's Friday April 11th at 2pm in London.
Wednesday saw the S&P 500 gain 9.5 percent. It was the
10th best day for the U.S. equity market in the last
century. Which raises a reasonable question: Is that a good
thing? Do large one-day gains suggest further strength ahead – or
something else?
This is the type of Research question we love digging into.
Pulling together the data, it’s pretty straightforward to sort
through those other banner days in stock market history going
back to 1925. And what they show is notable.
I’m now going to read to you when those large gains occurred, in
order of the gains themselves.
The best day in market history, March 15th 1933, when stocks
soared over 16 per cent? It happened during the Great Depression.
The 2nd best day, Oct 30th 1929. During the Great
Depression. The 3rd best day – Great Depression. The fourth
best – the first trading day after Germany invaded Poland in 1939
and World War 2 began. The 5th best day – Great Depression.
The 6th Best – October 2008, during the Financial Crisis.
The 7th Best – also during the Financial Crisis. The
8th best. The Great Depression again. The 9th best –
The Great Depression. And 10th best? Well, that was
Wednesday.
We are in interesting company, to say the least. Incidentally, we
stop here in the interest of brevity; this is a podcast known for
being sharp and to the point. But if we kept moving further down
the list, the next best 20 days in history all happen during
either COVID, the 1987 Crash, a Recession, or a Depression.
So why would that be? Why, factually, have some of the best days
in market history occurred during some of the very worst of
possible backdrops.
In some cases, it really was a sign of a buying opportunity. As
terrible as the Great Depression was – and as the grandson of a
South Dakota farmer I heard the tales – stocks were very cheap at
this time, and there were some very large rallies in 1932, 1933,
or even 1929. During COVID, the gains on March 24th of 2020,
which were associated with major stimulus, represented the major
market low.
But it can also be the case that during difficult environments,
investors are cautious. And they are ultimately right to be
cautious. But because of that fear, any good news – any spark of
hope – can cause an outsized reaction. But it also sometimes
doesn't change that overall challenging picture. And then
reverses. Those two large rallies that happened in October of
2008 during the Global Financial Crisis, well they both happened
around hopes of government and central bank support. And that
temporarily lifted the market – but it didn’t shift the overall
picture.
What does this mean for investors? On average, markets are
roughly unchanged in the three months following some of these
largest historical gains. But the range of what happens next is
very wide. It is a sign, we think, that these are not normal
times, and that the range of outcomes, unfortunately, has become
larger.
Thanks for listening. If you enjoy the show, leave us a review
wherever you listen and share Thoughts on the Market with a
friend or colleague today.
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