Thoughts on the Market: Is the Market Rebound a Mirage?
Hosted by Morgan Stanley
Release Date: April 11, 2025
Introduction
In the episode titled "Is the Market Rebound a Mirage?", Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley, delves into the remarkable market gains observed in recent times. Released on April 11, 2025, this episode provides a comprehensive analysis of significant one-day stock market surges, comparing them with historical data to assess their implications for future market movements.
Historic Market Gains: A Closer Look
Andrew Sheets begins by highlighting the extraordinary performance of the U.S. equity market on Wednesday, where the S&P 500 surged by 9.5%. He remarks,
"Wednesday saw the S&P 500 gain 9.5%. It was the 10th best day for the US equity market in the last century."
[00:00]
This remarkable gain prompts the central question of the episode: Do large one-day gains indicate continued market strength, or do they signal something more transient?
Historical Context: When Big Gains Occurred
Delving into historical data dating back to 1925, Sheets meticulously catalogs the ten best days for the U.S. stock market, revealing a pattern where many of these significant gains occurred during periods of economic distress. He enumerates:
- March 15, 1933 - +16% during the Great Depression
- October 30, 1929 - During the Great Depression
- Subsequent days during the Great Depression
- First trading day after Germany's invasion of Poland in 1939 - Beginning of World War II
- October 2008 - Financial Crisis
- Other days during the Financial Crisis
- Great Depression days
- March 24, 2020 - COVID-19 Pandemic and associated stimulus measures
He observes,
"The next best 20 days in history all happened during either Covid, the 1987 crash, a recession, or a depression."
[02:50]
Interpretation of Big Gains in Adversity
Sheets explores the paradox of significant market rallies occurring amid severe economic downturns. He explains that during such periods, stocks are often undervalued, presenting buying opportunities for investors. For instance, the rally during the Great Depression was partly due to stocks being "very cheap," allowing for substantial gains when investor confidence was restored.
However, he also cautions that:
"During difficult environments, investors are cautious and they're ultimately right to be cautious. But because of that fear, any good news, any spark of hope can cause an outsized reaction."
[01:30]
This means that while large gains can signify optimism, they might not necessarily alter the underlying challenging economic conditions, leading to volatility and potential reversals, as seen during the October 2008 financial crisis.
Implications for Investors
Sheets offers insights into what these historical patterns mean for present-day investors:
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Average Market Response: Historically, markets tend to remain roughly unchanged in the three months following some of these largest historical gains, suggesting that a single day of significant growth does not guarantee sustained upward momentum.
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Increased Uncertainty: The range of outcomes post-gain has expanded, indicating that the current market environment is unprecedented and highly unpredictable. He states,
"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."
[02:20] -
Sign of Uncertain Times: The occurrence of large gains in fraught economic times is a signal that these are not normal times, and investors should be prepared for a broader spectrum of possible market trajectories.
Conclusion
In wrapping up, Andrew Sheets emphasizes the importance of historical perspective in interpreting market movements. While significant one-day gains can be encouraging, they often occur in contexts of economic strain and can lead to varied outcomes. Therefore, investors should approach such rallies with a balanced view, recognizing both the potential for opportunity and the inherent uncertainties of the current market landscape.
Note: The timestamps correspond to the points in the transcript where the quotes were made.