Data from investor Howard Marks shows why there may be another drop in stocks coming soon

This comeback rally for stocks won’t last, if history is any indication.

Data compiled by investor Howard Marks shows that, during the two previous bear markets, the first big comeback rallies have been followed by sharp declines until a bottom was ultimately reached.

“The first and second declines were followed by substantial rallies . . . which then gave way to even bigger declines,” Marks, co-founder of Oaktree Capital, wrote in a memo. His memos are widely read on Wall Street. 

The S&P 500 dropped 27% between September 2000 and April 2001 as the Dotcom bubble burst. The broad index then rallied 19% between April 2001 and May 21 of that year. However, those gains were wiped out by a 26% pullback that ran through September 2001. The S&P 500 then rallied 22% through late March 2002 only to drop 33% and ultimately reach a bottom in October of that year.

The market followed a similar pattern between late 2007 and early 2009 amid the financial crisis.

Between Oct. 9, 2007 and March 10, 2008, the S&P 500 dropped 18%. That decline was followed by a 12% jump through late May 2008. From there, the S&P 500 plummeted 47% through November 2008. The S&P 500 then rallied 25% through early January 2009 but then dropped 27% to reach a bottom in March 2009.

During the current bear market, the S&P 500 fell 33.8% from a record high set on Feb. 19 through March 23. Since then, the broad average has jumped more than 20%. The market’s wild moves come as the coronavirus outbreak roils economic growth expectations along with consumer sentiment.

“The bottom line for me is that I’m not at all troubled saying markets may well be considerably lower sometime in the coming months,” wrote Marks.

Still, Marks said he is adding to his equity exposure.

“The risks in the environment are recognized and largely understood,” he said. “Thus, I feel it’s a time when previously cautious investors can reduce their overemphasis on defense and begin to move toward a more neutral position or even toward offense.”

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