‘2020 Lows Are in, Repeat of The Great Depression Seems Unlikely’: Fidelity’s Timmer

The S&P 500 index has gained around 40% since hitting a three-year low on March 23, spurred by the Federal Reserve’s massive stimulus. The year is already halfway through and now it rests with the stock market to prove that it was right about a sharp V-shaped rebound in economic growth.

Empirically, big price gains, combined with a large retracement after a fall amid strength in market broadness – a trend that can be seen in the S&P 500 today, has always led to a start of a bull market.

There is rising speculation among investors that the recent uptrend in stocks is just a bear market rally. Jurrien Timmer, director of global macro in Fidelity’s Global Asset Allocation Division writes “Yes, but it’s not likely.”

2020 lows are in

Jurrien Timmer, director of global macro in Fidelity’s Global Asset Allocation Division wrote that 1929 and 1937 serve as a warning that there is nothing in the charts currently – in terms of price and breadth – that guarantees that the present rally is not a bull trap on the way to new lows. He added that since the 1930s, the current setup has always been a new bull market. But the market is a nonlinear dynamic system, not a static one (like a coin toss would be), so we can’t get too complacent.

“Having said that, for the record, I do think the lows are in and I do not think this is another 1929 or 1937. Part of what makes the system dynamic instead of static is the policy response, and today’s monetary (and fiscal) policy could not be more different than the policies 90 years ago,” wrote Fidelity’s Timmer.

Fed policy during the Great Depression vs 2020

Jurrien Timmer, director of global macro in Fidelity’s Global Asset Allocation Division wrote that the crash of 1929 was part of a massive deflationary spiral, and while the Fed did cut rates, it was nowhere near enough to offset the collapse in prices. As a result, while the market was falling 86%, the inflation-adjusted Fed policy rate soared to 16%.

Then, in April 1933, the United States government finally reflated by devaluing the dollar. It did so first by confiscating everyone’s physical gold and then increasing its price from $20 to $35. That was a one-time devaluation of 43% during the gold standard. That reflationary policy response probably helped the market recover, but by April 1933 the damage was already done: The stock market had lost most of its value (86%) in 1932, almost a year earlier. Too little too late, he added.

Jurrien Timmer, director of global macro in Fidelity’s Global Asset Allocation Division further wrote that “fast forward to 2020: This time we are seeing the polar opposite. The real Fed policy rate, adjusted for inflation, and considering the effects of quantitative easing (QE), was already negative to begin with since the global financial crisis (GFC). It has now become vastly more so, with the Fed adding some $3 trillion to its balance sheet in the span of only a few months. Therefore, it’s difficult for me to see the market going down the same path as the 1930s.”

“Having said that, this doesn’t necessarily mean that the market will just keep advancing from here. Unless the earnings estimate for 2022 are too low, I believe the market has probably already priced in too much recovery. But, in my view, the Fed has done an effective job at putting a floor under financial assets by removing the left tail. It couldn’t be a starker contrast to the 1930s markets,” wrote Fidelity’s Timmer.

Fidelity’s Timmer concludes

“I am sticking with my thesis that the lows are in, but that the market is not a layup from here. While a repeat of the Great Depression seems unlikely, it is good to at least be aware that the strength of the rally so far does not guarantee a continued bullish outcome.”