Here’s why recent surge in S&P 500 couldn’t last, according to market history

Last week stocks knew only one direction: straight up. That hasn’t lasted.

The S&P 500 gained more than 12% over the four days of the holiday-shortened week that ended last Thursday, but this week has been anything but consistent, with stocks falling on Monday, rebounding Tuesday and then heading right back down again on Wednesday.

More bad economic numbers are piling up, from a manufacturing decline to the worst retail sales ever to an unprecedented fall in homebuilder confidence, and all in all, an economy “clearly in ruins here” and even worse than Wall Street expected.

“This points to a very severe recession, because this is just the beginning of a series,” Peter Cardillo, chief market economist at Spartan Capital Securities, told CNBC on Wednesday morning. “The consumer’s not spending. … What does that mean for the market? I think it means we may have a short-term top here,” Cardillo said.

An earnings season expected to be unlike any other remains a wildcard. A slew of big bank earnings, a key economic indicator, were out on Wednesday morning, and banks set aside billions in loan-loss reserves related to the coronavirus.

A market gain like last week’s is not typical. In the past two decades, there have been only five instances when the S&P 500 gained 10% over a four-day period, and two of them came during the worst of the financial crisis. What came next for stocks in the weeks after these sudden stock surges?

In the two weeks after such gains, the S&P and Dow Jones Industrial Average have both posted negative average returns, though both avoided any dramatic pullback, down less than 1%, according to a CNBC analysis of data from Kensho, a hedge fund trading tool.

In the month following these rapid gains, stocks held up better. Both the S&P and Dow posted one-month gains over 1%. The S&P 500 was the stronger of the two, positive in four of these previous five trading windows.

The worst periods when rapid gains were followed by stock declines were during late 2008. In October and November of 2008, the S&P posted returns of 14% and 18% in two separate four-day trading windows. After both, the S&P and Dow were down in the two-week period that followed. In the month that followed those late 2008 events, only the S&P was able to eke out a positive return, and at only 0.33%.

The IMF is expecting the worst recession since the 1930s.

The coronavirus has created an unprecedented situation for the market and investors with so much riding on an economic reopening predicated on a continued flattening in the virus curve across the nation, but both remain hard to estimate, and reopening too soon could lead to another spike in virus cases in more places.

Goldman Sachs analysts said this week that the market is unlikely to make new lows if there is no second surge in infections, which remains a top tail risk for the markets.

“The market tends to look across the valley,” Sam Stovall, chief investment strategist at CFRA told CNBC on Tuesday. “If we get actions by the government that will end up aiding the economy … if there’s some justification for their optimism, even if it’s six months down the road, that will encourage the markets.”

Recent trading history has shown that investors don’t need to rush back into stocks to see long-term market-recovery gains. Data also shows that as the market searched for an all-clear signal during the financial crisis of 2008, it took more time than any single rally suggested, though the coordinated response from Washington, D.C., this time has been highlighted as a notable difference.