The bullish case for stocks with major averages already up more than 20% from the lows
U.S. President Donald Trump addresses the daily coronavirus task force briefing in the press briefing room at the White House in Washington, U.S., April 4, 2020.
Joshua Lott | Reuters
Stocks powered higher Monday, amid a glimmer of hope that the coronavirus outbreak may be getting close to peaking and will ultimately give up its stranglehold on the economy.
For sure, there are some positives amid the gloom of a growing number of virus cases and rising death count. Even though health officials warn this is a pivotal week and the number of cases will jump, some of the hardest hit cities like New York, New Orleans and Detroit may be coming to a peak in infections.
Investors were encouraged by closely-watched data from Johns Hopkins University that showed the increase in U.S. cases slowed Sunday, but it is too early to determine if it is a lasting trend. There were 30,000 new U.S. cases Thursday; 32,100 Friday; 33,300 Saturday, then a falloff to 28,200 on Sunday.
“It seems that each day that passes we seem to be getting to better place on containment. It’s still a long road ahead, but some of the more dangerous places seem to be getting some control of it,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “It’s still a long road ahead and a long road to getting to the other side of the mountain and what this means for opening up the economy again, but there’s hope. The shutdown seems to be working.”
Traders also took some positives from signs the outbreak in Europe may be slowing. Germany is is drawing up a plan to end the lock down, Italy’s new cases fell sharply and the decline in Spain’s death count continues. In the U.S., New York officials for a second day Monday discussed a plateauing in cases and a possible apex.
“We see light at the end of the tunnel,” said President Donald Trump Sunday, warning also that a “horrific point” is ahead as the death count rises.
The Dow was up 1,627 points or 8% at 22,679 Monday, and is now 24.5% off its March 23 low. The S&P 500 was up 7%, at 2,663, and is now 21.5% above the late March low. Some strategists say could be a bottom but many believe the lows could be retested.
“The stock market will bottom before the economy does, The stock market may have bottomed at 2,192 on the S&P,” said Bob Doll, chief equity strategist and senior portfolio manager at Nuveen. “On average, stocks bottom four or five months after the recession does. That would suggest now is probably the time.”
Economists expect the economy has entered a recession and will trough with a contraction of about 30% in second quarter GDP. But they also expect a spring back of varying degrees, beginning in the third quarter.
“That will be the next challenge for the market, when they start to face that the economy is different, and it’s not going back to normal any time soon,” said Boockvar. “At least for now, the market will take any good news on the virus as a positive. We were talking about the duration of the spread, then we were talking about the duration of the shutdown, and we will be talking about how long it will take for the economy to get back to normal.”
The double barrel of monetary stimulus and fiscal stimulus is also helping the market and is expected to support the economy as it moves past the massive shutdown of the economy.
Doll said stocks are in a second technical phase of a bear market and it will continue to be choppy.
“What we want to see on these rallies and these declines is less intensity, a lower VIX, fewer names on the new low list,” Doll said on CNBC. “That’s in my judgement what drives markets in this environment, not so much what are the earnings.”
As stocks rallied Monday, bonds sold off, and yields, which move opposite price, were higher on the day. The 10-year yield was at 0.67%. Credit yields, meanwhile, improved on the optimism.
“It’s really slightly positive, but enough to get people a little bit geared up,” said Andrew Brenner of National Alliance. “High yield and IG spreads are better, not significantly but better. We continue to see a huge amount of corporate [debt] buying. There’s huge demand.”
The stock market’s surge came after last week’s 2% decline in the S&P 500 amid concerns about how long the virus shutdowns will last and the economy was going into free fall. Already, job losses in America were expected to be well above the 10 million workers already seeking benefits.
In fact, with the Dow up more than 1,000 points Monday, it is not unlike last Monday when stocks rallied on the prospects of new treatments and testing, and a sense that the Trump administration was taking strong steps to stop the spread of the virus by extending coronavirus guidelines until April 30.
Still, the rally reignited the debate about whether the market has found a bottom or not.
“We’re going to have a lot of ups and downs, but if we’re past the acute phase of this virus, that’s a positive, but that does not signal the all clear,” said Boockvar. “We’re going to have a lot of rallies, a lot of sell offs. I’m confident we hit a bottom toward the end of March, but I have no confidence we hit the bottom.”
Mike Wilson, Morgan Stanley’s chief equity strategist, was bearish when others were bullish ahead of the sell off. Now he’s sounding a bit more bullish.
“For what it’s worth, we don’t think we will have full retest of the lows, nor do we think this is the beginning of a depression,” said Wilson, in a note. “We think this is the end of a cyclical bear market that began two years ago in the context of a secular bull market that began in 2011.”
Wilson said he expects earnings to decline by about 20%, but values still look attractive even so. Companies are increasingly withdrawing guidance, particularly in cap goods, materials, retailing, real estate, hotel and restaurant sectors.
Wilson said his view has been the secular bull market would contain a cyclical bear market around a recession, and one feature when the bull market resumes will be inflation. “The global pandemic is just the catalyst that may allow all of these building pressures to work in concert,” he noted. The reversal of globalization is one trend that would add to costs, as will rising wages and dollar weakness.