'Keep some powder dry': A Wall Street chief strategist explains why stocks could repeat an ugly crash that's only occurred once since World War II

• Stocks have regained more than half of their coronavirus-related losses, fueled by their best weekly performance since 1974.
• Only one post-WWII bear market, in 2001, featured a 20%-plus rally that did not effectively end the Dow's slump, notes Jim Paulsen, the chief investment strategist of The Leuthold Group.
• He expects the 2020 bear market to be the second instance and is not fully reinvesting in stocks just yet.
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The S&P 500 posted its best week since 1974 during the shortened trading period last week. Two weeks earlier, the Dow Jones industrial average had its best five-day showing since 1938.

Huge milestones like these can lead one to believe that the worst of the coronavirus-fueled crash in stocks is over. But not so fast, says Jim Paulsen, the chief investment strategist of The Leuthold Group.

"That incredible bounce is much more likely to be the first of at least a few bear market rallies," Paulsen said of the Dow's milestone in a recent note.

He observed that only one post-WWII bear market, in 2001, featured a 20%-plus rally that did not effectively end the slump. At that time, stocks staged a 29% rally before cratering beneath their previous low after the September 11th attacks.

"We expect the bear market of 2020 to eventually join that list," he said.

There remains considerable uncertainty about how quickly the economy will return to full strength after its forced shutdown. The timing of a vaccine that averts a second wave of new infections is also unknown.

Apart from these uncertainties, Paulsen cited three reasons why he is reluctant to go all-in on stocks as though a new bull market has started.

Firstly, the deepest discounts are no longer available - for now.

The S&P 500 was off 34% from all-time highs at its lowest point in March. After the rally into the long weekend on Thursday, it was down about 18%. This meant it had already recovered nearly half its losses.

In fact, a popular metric that values stocks in relation to future earnings estimates has risen back to its pre-crash level because analysts' forecasts are only now catching up to reality. Jonathan Golub, the chief US equity strategist at Credit Suisse, observed that the S&P 500 is trading around 19 times its 12-month earnings estimate - back to where it was at the record high in February.

The so-called price-to-earning multiple is skewed by the arithmetic of lowered earnings forecasts. But it is telling of what analysts are bracing for where the most important driver of stock prices is concerned.

Paulsen's second observation is that valuations for large-cap stocks remain above levels that were seen at even the most expensive bear-market low ever. That's true even if you account for the March 23 bottom.

And thirdly, Paulsen says he has a hard time accepting that the excesses of an eleven-year bull market were dealt with within a month. Even the depths of declines on some trading days in March were not enough to convince him that the shake-out was vigorous enough.

He highlighted a few of these so-called excesses, including the 70% growth of corporate debt since 2012, which gave rise to many so-called zombie companies that could struggle in this downturn.

For all these reasons, Paulsen is not in a hurry to fully reinvest his clients' money to his maximum equity allocation of 70%.

"Keep some powder dry," he concluded.

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