Stock Market Recovery Continues

Another Rally

Yes, technically Monday’s rally followed a decline on Friday. But the fact that stocks increased feels like we are in a winning streak since we didn’t get closer to last Monday’s low. S&P 500 has increased in 5 of the past 6 trading days. It just missed reversing the entire selloff on Friday. Everyone said we needed to re-test the low. 

That likely will not happen because the Fed juiced the market by buying corporate debt. Many are so bullish that once the number of new COVID-19 cases in America shows clear signs of peaking, the market will near a record high. Logically, if the coronavirus was to be eliminated today, the market would be substantially higher than its February peak. That’s what a huge round of fiscal and monetary stimulus does for the market.

Rally & Recovery Timeline

Obviously, COVID-19 isn’t over yet. The situation has gotten much better in Italy over the past few days, but the backlog of active cases hasn’t ended the tragedy yet.  We don’t expect Italy’s economy to reopen until at least the beginning of May. The country was ravaged as 11,591 people died. 

Leaders will be very wary about reopening quickly. Italy’s reopen is important because people want to know if the virus will come back. Many investors don’t believe China’s numbers or they don’t think it can be replicated because it is an authoritarian government. Everyone is looking to Italy to see what will happen.

Italy’s peak in the number of new cases caused the rally in stocks because it signaled a peak is coming in America in the first half of April. Italy’s peak in the number of new daily cases was on March 21st and it’s still not close to reopening. America could be looking at reopening late May/ early June if it follows Italy. 

However, it wouldn’t be surprising if NYC reopens relatively soon. Keep in mind that because America is behind, treatment and cures can be worked on in the meantime. There will be another huge crash in stocks if Italy faces trouble reopening in a few weeks. If stocks rally in the meantime, that will only exacerbate the decline.

The chart above shows a potential timeline for the rally and economic recovery if everything goes according to plan. We are almost done with the consumer panic and social distancing. U.S. cases will peak in a couple weeks. Policymakers might act further. That would be great for stocks. The market’s next test is earnings season. It's not that worrisome because everyone knows earnings will be weak and guidance will be non-existent. Any information we get will lower uncertainty and help stocks.

Personally, I disagree with the premise that the stimulus will kick in starting in May and last for the summer. The stimulus is in play now because people are getting an extra $600 in their unemployment insurance checks. And economic recovery will start in June and last the rest of the year. Recovery will start whenever the economy reopens. Many are confident that will occur in May or June. We might start to hear discussions of a reopening in 2 weeks when cases peak.

Review Of Monday’s Market

Nasdaq was up 3.62% and the Russell 2000 rose 2.33%. VIX fell 8.46 points to 57.08. The market is slowly normalizing. We expect to see the VIX fall even in down days because it is so high. CNN fear and greed index rose 2 points to 25 which is extreme fear. It might finally leave that category this week after being there for a few weeks. 

As you can see from the chart below, the companies that borrowed money to buy back stock vastly underperformed the overall market in this bear market.

Every sector rallied. Only stocks that were hurt were the travel names and some energy stocks. For example, American Airlines stock fell 12.75%, Royal Caribbean fell 13.71%, and Marriott International fell 3.41%. Worst sector was energy as the majors rallied, but small drillers and oil service names didn’t. 

As you can see from the chart below, WTI oil fell to its lowest level since February 2002 as it was at $20.09. Small players are likely going to go bankrupt. Firms with strong balance sheets like EOG Resources and Schlumberger will be ok. Best sector was healthcare which rose 4.67%.

COVID-19 Update

COVID-19 situation was a mixed bag on Monday. NYC had bad news as there were 4,613 new cases which was up from 2.703. This surpassed the previous high which was on March 25th. Many were hoping that would be the final peak even though we expected a peak within the next 1-2 weeks. 

As you can see from the chart below, Italy is improving each day. There were only 4,050 new cases on Monday which was the lowest since March 17th. There are still 75,528 active cases in the country as its hospital system has been overrun. That’s why many see no chance of it reopening in the next 2 weeks.

America didn’t have a bad day. In the past 3 days, there has been a slightly higher number of new cases each day. On Monday, it increased from 19,913 to 20,353. With all this data coming out, the odds of there being 1 million cases in America by April 15th fell to 56%. 

Personally, I view this as highly unlikely. As of Monday evening, there were 956,481 tests in America. New York has tested about 1% of its population. We are in very good shape on testing and it’s only going to get better. Once we start testing everyone, the mortality rate will decline. Many expect it to be between 0.1% and 0.2%. 

Once we test everyone, people can start going back to work. On the weekend, Trump extended the social distancing guidelines until April 30th. That’s common sense because the number of new cases each day hasn’t peaked. You don’t want to let your guard down until a couple weeks after the peak.

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