In the stock market lately, only one thing is constant: speed. After falling into a bear market at the fastest rate ever, the S&P 500 just recorded its quickest three-day advance in nine decades. As absurd as it may seem, the Dow’s already started a fresh bull market — up more than 20% from the lows — after more than $2 trillion in value was created in three days. Is it a bear market bounce or something more sustainable?Nobody could possibly know for sure. While stocks had surely priced in a huge amount of pain, nothing compares with the coronavirus in terms of shock to the economy.
Using history as an imperfect guide, there’s reason to be skeptical — it’s taken stocks an average of 18 months to start to recover after first signs of an economic contraction. But with trillions of dollars of stimulus landing, the case for bottom feeding also exists.
It can’t be stated enough: no precedent exists for the current situation, in which a viral outbreak is killing thousands, has shut down economies and forced people to stay in their homes. This week, the number of people filing for unemployment insurance more than quadrupled the previous record. In Washington, Congress just passed a historic stimulus package.
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For every optimist who says we could be witnessing the start of something real, there’s a pessimist to remind you that the largest stock rallies happen in bear markets. Here’s six views on whether or not this epic rally will last.
Sentiment hasn’t washed out
When Emily Roland, the co-chief investment strategist for John Hancock Investment Management, talks to financial advisers, she still hears mixed signals. Some say their clients are petrified, while others are still fielding requests about where and when money should be put to work.
“The bottom will come potentially when we see sentiment completely washed out or everybody totally selling indiscriminately and giving up,” Roland said. “We’re not quite there yet.”
Light at the end of the tunnel
To John Stoltzfus at Oppenheimer Asset Management, the intermittent rallies over the last few weeks are a signal of where the market really wants to go. Those rallies could be challenged by any negative news surrounding the virus, but there’s a sense of relief over the prospects for fiscal stimulus. It helps that cyclicals and small-cap stocks, for instance, are gaining, said Stoltfus, the company’s chief investment strategist.
“The market is placing its vote on cyclicals and momentum and growth, it’s looking towards that,” he said. “It does appear that there is light at the end of the tunnel and it’s likely daylight and not a locomotive coming down upon us.”
Timing doesn’t add up
Normally, a 10% market decline lasts a year, while it takes about 1½ years to recover from a 20% drop, according to Northern Trust Wealth Management. The S&P 500 fell as much as 34%, and only a few days have passed since the bottom. Predicting exactly when the market will bottom is impossible, says Katie Nixon, the company’s chief investment officer, and investors should be wary of anyone who claims to have the answer.
“For risk assets, the best medicine is time,” Nixon said. “Market timing is notoriously impossible to forecast, and there are too many unknowns at this point. These include, most importantly, when infection rates will begin to decline, as well as the magnitude of earnings declines and the impact of monetary and fiscal policy measures, which is not immediate.”
Congress went big
While reported jobless claims Thursday were worse than expected, many investors are hoping the increase will be temporary, says Chris Gaffney, president of world markets at TIAA. What’s important now is that Congress passed its $2 trillion spending bill to help shore up the U.S. economy. More negative economic data will likely challenge the market, but support is coming.
“The stimulus is definitely what investors are looking at versus those horrible weekly numbers,” he said. “Congress went big, and I think it’s worked so far for investors.”
Absence of good news
The expectation of fiscal support is already priced into markets and going forward, there’s probably going to be a void of good news, said Lauren Goodwin, economist and multi-asset portfolio strategist at New York Life Investments. Investors still need more clarity on the economic impact of the virus and the extent of credit risk, as well as assurance that the market is functioning smoothly.
“The other thing we need to see before we can move on as investors is addressing the root of the problem, which is at its core a medical problem. I think case numbers have yet to spike in the U.S.,” Goodwin said. “We’re not out of the woods yet.”
Companies haven’t fundamentally changed
To Peter Jankovskis, co-chief investment officer at Oakbrook Investments, it’s reasonable to expect that badly beaten down companies would bounce back now that stimulus is in sight. As an example, he points to Chevron Corp., which saw its share price cut in half this year.
“There isn’t fundamentally anything that’s changed with that company. We’ve just seen a drop in demand for its product and a very well-understood reason for that drop in demand,” he said. “With a stimulus package … it’s reasonable to assume the shortfall is temporary.”
