U.S. stocks surged 16% in two months: Only four occurrences in history, the last being before the 1987 crash

Original Author: Zhao Ying

Original Source: Wall Street CN

The strong rebound in U.S. stocks over the past two months is triggering a historical warning signal. The S&P 500's cumulative 16% gain in April and May has only occurred four times since World War II. Three of those instances happened during post-recession recoveries, with the only non-recession precedent being several months before the 1987 "Black Monday" crash.

Deutsche Bank macro strategist Henry Allen points out that the current rally is not occurring against a backdrop of recession recovery, making the historical comparison particularly glaring. Meanwhile, credit spreads remain at historic lows, but pressure signals on the consumer side are accumulating, expectations for Federal Reserve rate hikes are rising, and the divergence between sovereign bond markets and stock markets continues to widen.

With multiple risk factors叠加, market tail risk is becoming unusually concentrated. Henry Allen wrote in his report, "The tail risks in the current distribution are exceptionally prominent, whether on a geopolitical level or a market level."

Rare Historical Precedent: The Only Non-Recession Case

The S&P 500's two-month gain of 16% in April and May has only four precedents since World War II.

Three of these occurred during strong post-recession rebounds: the recovery following the COVID-19 pandemic in April-May 2020, the rebound after the Global Financial Crisis in March-April 2009, and the recovery following the first oil crisis in January-February 1975.

The fourth instance was January-February 1987. That was just months before the "Black Monday" crash in October of that year—when the S&P 500 plunged 20% in a single day.

Henry Allen emphasized that while the current rally has fundamental support, including AI enthusiasm and strong economic data, "the pace itself has already broken through all recent precedents." In an economy that has not just emerged from a recession, a rebound at this speed has historically never had a good outcome.

Furthermore, the S&P 500 is on track for its fourth consecutive year of double-digit gains—a feat not seen since the late 1990s.

Credit Markets Overly Optimistic, Consumer Stress Signals Ignored

The strength in the stock market has also spilled over into credit markets. Credit spreads in both the U.S. and Europe are now even narrower than before the outbreak of the U.S.-Iran conflict, indicating a high tolerance for risk in the market.

However, warning signs on the consumer front are mounting. The U.S. personal saving rate in April was just 2.6%. Historically, similarly low levels have occurred in only two periods: a single month in 2022 (when excess savings accumulated during the COVID-19 pandemic were being depleted), and on the eve of the Global Financial Crisis. Meanwhile, the University of Michigan Consumer Sentiment Index hit a record low in May since records began in 1952.

The monetary policy environment is also tightening. The European Central Bank is widely expected to raise rates this month, and market bets on a Fed rate hike in 2026 are also heating up—supported by the U.S. April PCE inflation reading of 3.8% year-over-year.

Henry Allen noted that historically, a hawkish Fed stance has often coincided with widening credit spreads, as seen in 2022, late 2018, and 2015-2016. The current calm in credit markets represents a clear divergence from this historical pattern.

Bond Markets Buckle Alone, Divergence with Stocks Widens

While stock markets and credit markets appear highly immune to geopolitical risks, sovereign bond markets have taken a distinctly different path.

Over the past month, the 10-year U.S. Treasury yield has almost completely tracked oil price movements, clearly decoupling from the trends in other asset classes. In mid-May, sovereign bond yields hit multi-year highs: the 30-year U.S. Treasury yield rose to 5.18%, the highest since 2007; the 10-year German Bund yield rose to 3.19%, the highest since 2011.

At that time, stocks were just a stone's throw from their all-time highs, while bond yields were at levels unseen for over a decade. This divergence has shown no signs of converging so far.

Henry Allen believes that bond markets, which price in inflation and fiscal risks more directly, are more sensitive to geopolitical shocks. The persistent divergence between stock and bond markets is itself a manifestation of current market fragility.

Unexpectedly Stable Oil Prices: A Key Pillar for Risk Assets

The blockade of the Strait of Hormuz has lasted far longer than initial market expectations, yet the reaction of oil prices has been surprisingly mild, partially explaining the resilience of risk assets.

When the U.S.-Iran conflict erupted on February 28, the White House initially expected the operation to last 4 to 6 weeks. However, as of now, the Strait of Hormuz remains blocked. According to data from prediction market Polymarket, the probability of the strait returning to normal navigation by the end of June has plummeted from around 80% in mid-April to 22%.

Nevertheless, the oil futures curve has remained relatively stable. Just two weeks after the conflict erupted on March 13, the 6-month Brent crude futures contract settled at $85.66 per barrel. By June 1, that same contract was trading near $84.88, almost unchanged.

Henry Allen pointed out that precisely because the oil futures curve hasn't shifted significantly upwards, investors have not priced in severe stagflation risk, thus preventing a larger-scale sell-off in risk assets. However, he also warned that it remains uncertain whether this support can be maintained if the Strait of Hormuz blockade continues.