US equities have rallied sharply the past few weeks, with the S&P 500 Index (S&P 500) now 27% above its March 23 intra-day low of 2,189. We believe the March 23 low will— in hindsight—prove to be the low for this market cycle. What we find noteworthy about the stock market and S&P 500 today is that despite the unprecedented volatility of the past few months and the 35% correction in the S&P 500, it wouldn’t take much to get us back to the index’s all-time high of 3,393. Today the S&P 500 is off about 17% from its all-time high of 3,393, but consider that overtime the index tends to return about 10% a year. For the sake of argument, let’s posit that the market is flat from here until year end, and the S&P 500 closes out 2020 at 2,789 and the market goes onto return 10% in 2021 and 2022—a reasonable assumption considering market history. Were all this to happen, we would close out 2022 with the S&P 500 at 3,373, just 20 points or 0.5% shy of its all-time high. We recognize over two years is a long time to wait for the market to reclaim its former highs, but it should be a period well within the time horizon of most investors. Of course, were we to see the economy and corporate profits rebound rapidly from the COVID-19 driven downturn, which we think is probable, market gains going forward could exceed historical rates of return.
While we expect markets to remain volatile, and we brace ourselves for more bad news concerning both COVID-19 and the economy, we think the move higher in risk assets of late has been justified, as investors respond positively to the unprecedented steps being taken by the US Federal Reserve and the US Federal Government to mitigate the impact of the current healthcare crisis. More importantly, we have begun to receive some good news regarding COVID-19, as several nations start reopening their economies and rates of infection and hospitalizations improve in some of the hardest hit areas in the US. Going forward, the focus will remain on how well we are containing the pandemic, how effective US monetary and fiscal policy is proving in aiding the states, companies, and Americans most impacted by the healthcare crisis, and when the US economy might reopen.