In a recent post (“What Gives?”) I offered one potential explanation as to why the S&P 500 is within shouting distance of its all-time high while the economic environment remains so clearly poor. The argument was that individual stocks—and by extension the market as a whole—derive the preponderance of their value from their long-term earnings vs. those in the very near term. By extension, this logic implies that the duration of the hit to earnings is significant and that longer, more drawn out recessions and stretches of poor earnings should cause a more significant impairment to the market’s intrinsic value than shorter recessions would.
A recent chart from Bank of America Merrill Lynch lends some support to this argument at least in terms of how the market collectively has historically reacted to past recessions. The chart, presented below, reveals a relatively strong correlation between the length of past recessions and the total high-to-low drawdown for the S&P 500. The chart, which includes recessions since 1928, demonstrates that historically, the market has been most concerned not with how deep the recession is, but rather how long it goes on for.
The Reformed Broker “The S&P 500 is Mostly Concerned with Duration (Chart)” & Bank of America Merrill Lynch
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