Is the Market Rebound a Mirage?

Summary

Thoughts on the Market: Is the Market Rebound a Mirage?

Hosted by Morgan Stanley
Release Date: April 11, 2025

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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:

1. March 15, 1933 - +16% during the Great Depression
2. October 30, 1929 - During the Great Depression
3. Subsequent days during the Great Depression
4. First trading day after Germany's invasion of Poland in 1939 - Beginning of World War II
5. October 2008 - Financial Crisis
6. Other days during the Financial Crisis
7. Great Depression days
8. 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:

• 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.

• 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.

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Note: The timestamps correspond to the points in the transcript where the quotes were made.

Transcript

[A]

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%. It was the 10th best day for the US equity market in the last century, which raises a reasonable 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 15, 1933 when stocks soared over 16%. It happened during the Great Depression. The second best day October 30, 1929 during the Great Depression. The third best day Great Depression the fourth best. The first trading day after Germany invaded Poland in 1939 and World War II began. The fifth best day Great Depression. The sixth best October 2008 during the financial crisis. The seventh best. Also during the financial crisis. The eighth best the Great Depression. Again, the ninth best the Great Depression and the tenth 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 happened 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 the time and there were some very large rallies in 1932, 1933 or even 1929 during COVID the gains of 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're ultimately right to be cautious. But because of that fear, invest 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 for 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 enjoyed the show, leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.

[B]

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