History warns of clinging to bear market rallies—they can be dramatic but often fail, report Marvin Appel.

In the strongest bear market rally since the 1930s, the S&P 500 Index climbed more than 31% from March 23 to April 29 before retracing a bit. If the world weren’t under threat from a lethal new virus, one would think that a new day had dawned and that we were at the start of a new bull market akin to the one that began in March 2009.

However, after the crash of 1929 and in early 1930, the stock market also looked like it was emerging from the worst even though there were two more years of declines to new lows ahead (see chart below).  Even though unemployment now will rival Great Depression levels, I expect that our current situation will not be as bad as 1929-1932.  However, I do not think we are out of the woods yet.

s&p 500

For one thing, the news regarding the coronavirus is mixed at best, with U.S. having stalled in its progress in limiting the rate of new infections nationwide. 

Moreover, historical patterns are also not propitious for stocks in the coming months. Jeff Hirsch of the Stock Trader’s Almanac reported on April 30 that when the Dow Jones Industrial Average lost from November to April— as was the case from Oct. 31, 2019 to April, 30, 2020 — the coming six months were more likely than not to see further declines with an average loss of 4.5% in the Dow (see table below). The May to October loss of 4.5% following losses from November to April has been worse than the market’s overall performance during all past seasonally unfavorable May to October periods.

Of course, in any given year there might be big gains from May to October, as in 2017 or 2013.  However, these have historically been offset by losses in other years, such as 2008.  In my view this is just one more reason to remain cautious regarding stocks over the next several months.

DJIA Best 6 months

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