The Wall Street Bull, located in the financial district of New York.
Mike Roy | MCT | Tribune News Service | Getty Images
The rapid dip in the stock market in a bear market this year was almost matched by a blistered recovery from its lows.
Until Thursday’s close, the S&P 500 rose almost 25% from the low reached on March 23. The overall market average has also retraced half of its initial decline from its record level. The Dow Jones Industrial Average is up more than 28% from its low in late March, while the Nasdaq Composite has jumped 19.1% during this period.
The return to the market was mainly driven by three factors:
- Improved outlook for the coronavirus epidemic
- Massive monetary and fiscal stimulation
- Stabilize oil prices
“As we had hoped the coronavirus crisis would peak and unwavering support from the Fed, investor sentiment has changed,” said Lindsey Bell, chief investment strategist at Ally Invest, in a note. “This latest rally has been a welcome form of market volatility. But the world is changing fast. We think the markets may have to overcome obstacles before this bear really ends.”
Last week, the Dow recorded its seventh best weekly performance, while the S&P 500 posted its biggest gain in a week since 1974. The Dow’s fifth best week was March 27, showing the historic nature of this return. .
Improved virus outlook
Dr. Anthony Fauci, director of the National Institute of Allergies and Infectious Diseases, said Thursday that the US death toll from the coronavirus “looks more like 60,000 people”. This is well below initial estimates from the Trump administration, which ranged from around 100,000 to over 200,000 deaths. Fauci added that antibody tests for the coronavirus have been developed and will be available “very soon”.
The rate of new cases of coronavirus worldwide is also slowing. Data compiled by Johns Hopkins University shows that daily increases have fallen between 73,000 and 85,000 after reaching more than 100,000 earlier this month.
In the United States, daily increases in viruses appear to have peaked at around 33,000 while the hospitalization rate in New York – the state with the most confirmed cases – has declined.
“The virus seems to be starting to slow down, and the market is enjoying it,” said Mike Katz, partner at Seven Points Capital. “Now the question is how quickly people will get back to work.”
Actions have also received a boost as the government begins a massive stimulus campaign to curb the economic blow from the virus epidemic.
Great government intervention
The Federal Reserve released details of a group of programs to support the economy on Thursday. These programs, which total up to $ 2.3 trillion, include loans to small and medium-sized businesses as well as the purchase of high-quality and junk bonds. The announcement came after the Fed cut rates to zero in March and launched an indefinite quantitative easing program.
Congress and the Trump administration have also allocated billions of budget aid.
On March 27, President Donald Trump signed a $ 2 trillion stimulus package that includes direct payments to Americans of up to $ 1,200. The bill also provides loans to businesses to deter them from laying off workers and strengthens unemployment insurance.
“Governments are taking action with targeted large-scale fiscal stimulus, while central banks have broken their taboos on balance sheet expansion and asset purchases,” wrote Alberto Gallo, head of macro strategies at Algebris Investments, in a note.
Stabilizing oil prices also helped stocks as they allayed concerns over a massive wave of defaults in the energy sector.
West Texas Intermediate’s futures have risen almost 25% since reaching their 2020 low on March 30. However, oil prices are still down over 60% for the year.
Stragglers for sale at the head of the rally
Casino and energy stocks have been among the best performers since the start of the recovery from lows, after leading the market down.
MGM Resorts is up 59% since March 23 while Wynn Resorts is up over 22%. The S&P 500 energy sector, which has been shocked by the fall in crude oil prices, has jumped more than 43% since the overall market rebound.
Apache, Diamondback Energy and Occidental Petroleum have led the energy sector up since then. Apache shares have risen more than 90% since March 23, while Diamondback Energy has risen 71.1% during this period. Occidental Petroleum has since grown 58.5%.
Bank stocks are also among the market leaders in the context of the recent surge. Bank of America, for example, has increased 37.5% since late March while JPMorgan Chase is up 30%. Citigroup and Wells Fargo increased by 34% and 31.5% during this period. Overall, the S&P 500 financial sector has gained more than 33% since the end of March.
Energy and financial services have lagged the wider market in recent years, while leading technology stocks such as Facebook, Amazon and Apple have led the way. But Andrew Slimmon, managing director of Morgan Stanley Investment Management, said that a rotation in these multi-year laggards was underway.
“The rotation of leaders is a very good sign for the market as a whole,” said Slimmon. “You don’t get executive rotation unless it’s a sign that the market is starting to think about the recovery.”
“I’m not saying it goes straight up from here, but it’s a very good sign,” he added.
Admittedly, the significant averages are still well below the record highs they had set in February. They could also fall back under pressure as more data shows that the economic damage from the virus is greater than expected and if the outlook for the virus deteriorates again.
Market players are urging investors to stay on their guard.
“What is happening is that the markets are trading on speculation of bending of the curve. And that’s very good,” said Phil Blancato, CEO of Ladenburg Thalmann Asset Management. However, “the GDP figures will get very bad”.
“The overall profit situation is going to be quite difficult,” added Blancato.
Wall Street has already seen the massive economic shock from the coronavirus epidemic.
The United States has lost more than 16 million jobs in the past three weeks until April 4, according to weekly Department of Labor job demand data. This represents about 10% of the total U.S. workforce. The number of people who applied for unemployment benefits the week of April 4 totaled more than 6 million, breaking a record set the previous week.
A multitude of companies have also deleted their profit forecasts, citing the coronavirus epidemic, while others have reduced their profit forecasts. Corporate earnings season begins Tuesday, with JPMorgan Chase and Wells Fargo among the companies expected to be released.
Meanwhile, investors are still grappling with wild day-to-day market fluctuations.
The S&P 500 posted daily movements of at least 1.5% on six of the seven trading days in April. Since the March 23 low, the overall market average has moved more than 1% in 12 of the 13 trading sessions.
“You see movements that would normally take days now to occur in minutes,” said Katz of Seven Points. “There are many risks, but also many opportunities.”
Katz added that the market has been able to recover despite recently dismal economic data, noting “that it was a good sign” showing that the sale was exaggerated.
To subscribe to CNBC PRO for exclusive information and analysis, and live business day programs from around the world.