How the bumper US rally compares with previous two-week surges

Markets scaled new all-time highs recently following a ceasefire in the Middle East and hopes that a lasting resolution in imminent. 

The S&P 500 has now gained roughly 12% in just two weeks, one of the steepest rises ever seen over that timeframe. (For clarity this encompasses the trading days within a two-week period rather than 14 trading days).

While there have been stronger rallies, they have usually occurred deep within bear markets, which are commonly defined as a 20% drop from peak to trough.

The recent surge is unique because it is the first time the benchmark index has been propelled from a significant dip directly into a new all-time high. It has also been characterised by few interruptions or pauses for breath.  

Why past swift market advances were different

One of the steepest two-week rallies was seen in March 2020 when the S&P gained 23% following intervention by the Federal Reserve to start an aggressive round of QE (quantitative easing) which involved buying corporate bonds for the first time.

This sent a message to investors that the government would not let companies go bankrupt during lockdowns. 

Although early March proved to be the bottom, it would take many months before the S&P broke new ground, spurred on by Pfizer’s surprise announcement of a Covid vaccine in November 2020.

The same pattern was repeated in March 2009 when the Fed first started QE to reboot the financial system. This, combined with a relaxation of rules allowed banks to value their own assets, which generated a strong market rally.

However, the extent of market losses during the 2008 bear market ensured the S&P 500 did not reach new heights until 2013.

The bear market created lots of market volatility and ‘false dawns’ including the near 20% two-week rally in October 2008.

The 1982 market rally of close to 15% occurred after a prolonged bear market amid sky-high interest rates which touched a painful 21% at their worst point. 

The then Fed chairman Paul Volker signalled a loosing of monetary policy which led to a euphoric rise in stocks and the beginning of a multi-year bull market, although it took many years before the market broke to new highs.

In summary, these examples show prior rapid market gains typically occurred during very different environments where stocks were coming off steep falls and it took many months to for them to reclaim new highs.

What could explain recent gains?

It’s worth remembering that stock markets are forward looking which means they anticipate what could happen rather than worrying about the past. 

Markets don’t respond to any single outcome but a combination of possible outcomes which, means subtle shifts in the odds can have a big effect.

The emergence of peace talks has reduced the chances of a ‘worst case’ escalation of the conflict alongside a very negative impact on global growth.

In other words, the broad range of possible outcomes has been narrowed, easing uncertainty, which on balance, is a positive for risk appetite and market sentiment.

This has been enough to send stock prices to new highs and while it may appear optimistic, markets have a knack of discounting events.

How does this work in practice?

Large institutions play an important role in how markets price events and risks. In early March institutions reduced risk in their portfolios by selling stocks and raising cash.

Hedge funds increased their negative bets that stocks would continue falling as energy prices soared.

This means they were not ‘positioned’ for the ceasefire, creating ripe  conditions for a sharp rally in stocks as they scrambled to readjust portfolios for a less negative outcome.

Institutional positioning is one of the more challenging aspects of investing, although its effects tend to be short lived.