One thing that traders and investors have in common with everybody else is a tendency to reduce decisions to their simplest possible terms – an idea made very popular by the French philosopher, Rene Descartes back in the 17th century. But as Einstein pointed out there is danger on over-simplification too: “Problems should be expressed as simply as possible, but no simpler.”

I am speaking of the popular thinking in the investment world to consider the markets as being in either of two modes: Risk-on or Risk-off. Ah, if life could only be that simple. All that being said, I hasten to add that our general view is one of improving optimism. Let’s take a look at why that is.

First, earnings reports are quite encouraging with Tech leading the way. That was not entirely unexpected but what was unexpected was some truly blow-out numbers from big retailers like Walmart, Home Depot and Target. (Walmart’s online sales grew by 97%!)

National Economic Council Director, Larry Kudlow, reiterated that we should see “20%+ growth in the 3rd and 4th quarters”.

Today’s Manufacturing Purchasing Manager’s Index and Existing Home Sales both easily surpassed forecasts.

The U.S. and China are expected to hold trade talks “in the coming days” to assess the progress on their Phase 1 trade deal which went into effect in February. It’s good to know that we’re still talking to each other.

On the jobs front, new unemployment claims came up a bit, probably due to the many restaurants and gyms which had opened but went back to lockdown mode as a fear of a Covid-19 second wave swept throughout the land.

And, speaking of coronavirus, it sure looks like we’ve turned the corner. 39 of 50 states report fewer than 10% of hospital beds are being used for Covid patients. Only two states (Arkansas and Georgia) have >20% in use for Covid.

33 of 50 states report a decreasing trend of new cases. Arizona is leading the way with a its 14-Day trend showing a reduction of 50% — very good news indeed.

It also sounds like there’s movement on a fourth coronavirus stimulus bill, and there could be a vote in the House as early as next week.

And, I saved the best for last. We are very impressed with the Nasdaq making new records this week but even more important is that the S&P 500 reached new all-time highs as well. Climbing above its pre-Covid highs means that, technically speaking, the virus-induced bear market is over. Lasting for 126 days, it was the shortest bear market on record.

Ron’s Market Minute — What Happens after a Market Peak during a Recession?

It seems to me that whenever markets hit a new high, some media prognosticator is quick to suggest that it’s a time to sell stocks quickly before the markets retreat. With that in mind:

The S&P 500 Index* set a new record high this week for the first time since Feb. 19, giving us an eye-popping gain from its March 23 closing low of 2,237 to a closing high of 3,389 on Tuesday. As mentioned above, this represents the shortest bear market and third fastest bear-market recovery ever.

So, the media appears to have responded predictably that it’s time to get out of stocks.  However, Wall Street’s top stock market forecasters (and we as well!) think there could be more gains ahead.

Reaching a record high in stocks is not an obstacle to further gains. Since 1960, one-year returns after the S&P 500 has hit a high have been 11.8% on average. (source Mark Haefele, UBS)

Here’s the take from another mega custodian – LPL Financial’s Ryan Detrick.

In looking at history for comparable stock market runs, he commented, “One, three, six, and 12 months after the first new high in more than five months show stronger performance than average, yet another reason to think that this bull market from a long-term point of view could have some more tricks up its sleeve.”

These views come as the economy appears to me to be in pretty bad shape. Yesterday, we learned initial jobless claims unexpectedly ticked up above a million once again, ending a four-week streak of declines. But remember (to repeat myself), the stock market is a leading indicator, meaning prices largely reflect what’s expected to come and less so what’s already happened. And what we’re witnessing isn’t unprecedented.

“[W]e found there were four other times the S&P 500 made a new high during a recession: In February ’61, July ’80, November ’82, and March ’91,” Detrick said. “Incredibly, a new expansion started the following month every single time. Could stocks at new highs be signaling an end to this recession? We think that very well could be the case again this time.”

Keep in mind that recessions don’t end when things are great. They end when things stop getting worse. Remember that because, as we noted earlier, stocks are a leading indicator.

If you’re also leaning bullish, note that even the 2009 financial crisis recession points to a potential further 11% gain between now and year-end. The 2009 market turnaround began in the depths of a recession. It is obvious, of course, that the years 2009 and 2020 are very different. In 2009, financials led the way. Today, it’s tech. In the end, remember that bottoms occur when government policy matches the scope of an economic downturn, and also that the nature of the market’s recovery will vary (perhaps immensely) by sector, but the overall return- driven by another sharp earnings rebound- is likely to be more similar than one would think.  (Perhaps especially more similar than the media would think!)

So… If indeed the markets continue to follow the paths of returns after a new market high during a recession the S&P Index* could potentially end the year within reach of 3,800. I note the guffaws at Goldman Sachs’ recent bullish target of 3,600.

Reaching 3,800 would be a surprising feat. But, what else would you expect from 2020?

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk

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Ronald Denk is an Advisory Representative offering services through Denk Strategic Wealth Partners, A Registered Investment Advisor. He is also a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation. Information in this commentary is the sole opinion of Denk Strategic Wealth Partners. Past performance is no guarantee of future returns. All market related investments involve various types of risk, which include but are not restricted to, credit risk, interest rate risk, volatility, going concern risk, and market risk.

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*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.

Ron Denk is a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Mr. Denk is also an Advisory Representative offering services through Denk Strategic Wealth Partners, a Registered Investment Advisor. Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation.

Please see Denk Strategic Wealth Partners’ Client Relationship Summary here for succinct information about the relationships and services DSWP offers to retail investors, related fees and costs, specified conflicts of interest, standards of conduct, and disciplinary history, among other matters.

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Past performance is not a guarantee of future returns.