Faster Stock Market Recovery Than 1987

Explosive Recovery Continues

With the modest rally in big cap stocks, this became the best week for the S&P 500 since 1974. S&P 500 was up 12.1% this week. We can only imagine the records that would have been hit if this week had 5 days in it. On the other hand, we might have seen a decent pullback if the Fed’s announcement that it would be buying some junk bonds wasn’t made. 

S&P 500 is now on a 3 day winning streak as the CNN fear and greed index rose 12 points to 43. It is in the upper edge of the fear category. It could easily get into greed next week. S&P 500 is only down 13.65% year to date.

Better Than 1987 Recovery

Nasdaq was only up 0.77% on Thursday; its 10.6% rally this week made this its best week since 2009. Nasdaq 100 is up 4% year over year and only down 5% year to date. Instead of the tech and SaaS stocks crashing, they have simply underperformed on the way up. 

Dow was up 1.22% on Thursday and over 12% on the week. This was its 7th best week ever. It was its best week in 2 weeks.

As you can see from the chart below, this recovery in the Dow has been much stronger than the recovery after the crash in 1987. In 1987, there was a relatively quick recovery since there wasn’t anything fundamentally wrong with the economy. Now we are facing the greatest decline in GDP since the Great Depression. 

Investors are optimistic about the possibility of a recovery in the 2nd half of the year. Plus, they are confident in the fiscal and monetary policy support. As you can see, volume fell after the trough. Similarly, volatility is falling now. VIX was down 1.68 points to 41.67. It will get below 30 by the end of the month.

Small Caps & Regional Banks Rally Hard

Speaking of monetary policy, the Fed’s expansion of its previous announcement to include buying some junk debt (fallen angels) helped the Russell 2000 as this index includes a lot of money losing firms with poorly rated debt. The index rose 4.62% on the day; it’s up 18.5% since April 3rd

KBW regional ban ETF rose an amazing 7.91%. It has increased too far too fast as it’s now up 26.63% since April 3rd. We could see a pullback in this index soon. Regional banks were helped by the Fed, but hurt by treasuries as the 10 year yield fell 4 basis points to 0.73%.

WTI oil fell $1.9 to $23.19 as it is back in the low 20s which is near its recent trough. OPEC plans to cut 10 million barrels of oil per day in May and June before tapering the cuts to 8 million for the rest of the year. Then from 2021 to April 2022, the cuts will be 6 million. We could end up seeing a massive spike in oil prices in 2021 or 2022 once demand increases and the glut is drained because capex has been decimated. 

Exxon cut its capex in 2020 by 30% which was a $10 billion cut. It’s no surprise with the big decline in oil prices, energy stocks fell. It was the worst sector, but actually only fell 1.08%. Energy sector might be done falling. Majors have a massive share in the sector now that many of the frackers are penny stocks. Best sector was the financials as it rallied 5.19%. Real estate and utilities were up 5.15% and 4.75%.

Not A Bear Market Rally

Maybe this isn’t a bear market rally. It sounds silly to even suggest this is a bear market rally because of how much the market is up. As you can see from the chart below, the biggest bear market rally in the 2008 bear market was about 24% and the biggest rally in the 2001 bear market was about 21%. The market is currently up 28%. The chart below was made in March 2019. It promoted the possibility that the rally from Christmas Eve 2018 was a bear market rally. 

Obviously, it wasn’t as the market went on to have another great 11 months before this bear market. Nasdaq had a massive 45% bear market rally in 2001, but that’s an exception to the rule.

COVID-19 Update

The market is in this weird phase where it can look forward with great certainty that the number of new cases will peak and decline soon, while ignoring the economic ramifications of the shutdown. It’s possible that as COVID-19 fades and we get closer to the end of the shutdown, people will start to realize the destruction it has done to the economy. 

We are anywhere from 1-4 weeks away from that assuming that realization comes before the end of the shutdown.

As you can see from the chart below, the 7 day average number of new cases in Europe has peaked, while it’s almost at its peak in America. According to healthdata.org, hospital resource use peaked on April 11th

Total deaths are expected to be 60,415 which is much below the range from a couple weeks ago which was 100,000 to 240,000. Thankfully, the models were too aggressive.

On April 9th, there were 33,536 new cases in America which was up from 31,935. It was the 2nd most new cases in a day. We can be fairly confident there won’t be another peak higher than the one on April 4th. Unfortunately, global deaths are about to hit 100,000. 

Good news is the number of active cases in Italy is about to start going down in a few days. It increased from 95,262 to 96,877. It wouldn’t be surprising if it never gets above 105,000. 

Spain had a great day as there were 5,002 new cases which was the lowest since March 22nd. Number of new deaths was the lowest since March 23rd. We are at the peak in active cases as it only increased 203 to 85,610.

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