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Stocks recorded their best week in 11 years and posted back-to-back gains for the first time in over a month, even though the S&P 500 remains about 25% off its February high. The Federal Reserve announced open-ended asset purchases and other measures to support the flow of credit to employers, consumers and businesses. Additionally, Congress and the White House reached a deal on an unprecedented $2 trillion stimulus package to offset the fallout from the coronavirus outbreak. We believe a flattening of the infections curve in new coronavirus cases globally is eventually needed for stocks to start looking past the incoming decline in GDP and earnings, but policy support can help prevent this health crisis from evolving into a more prolonged, full-blown financial crisis.
Bear markets are fueled by bad news, and given the double whammy of the health care crisis and the market sell-off, that fuel tank has been filled to the top lately.
However, the market took a new (and welcomed) turn last week, mounting a rally that sent stocks 10.3% higher – the best week since 2008 – as rays of sunlight peeked through the bear-market cloud cover1. Here are five pieces of good news that we think should support investors' resolve:
Is the Coast Clear?
The market has risen 10.3% from its lows last week – an encouraging, but not surprising, rally1. At the same time, we don't think this is a new one-way direction higher. As we noted a few weeks ago, we think four things will be necessary for volatility to subside and the sustained rebound to take shape: a peak in new virus cases in the U.S., extraordinary monetary-policy stimulus, a sizable fiscal-aid package that preserves the labor market, and a downward revision to expected corporate earnings that provides some clarity about the path for profits later in 2020 and into next year.
We think progress is being made on this list, but bear in mind that financial aid from the U.S. Treasury and unprecedented stimulus from the Fed are not a cure for what ails the markets. Instead, we view them as the bridge that will help the economy to the other side of this expanse. This bridge will need to be built quickly, and the heavy traffic (of financially distressed businesses) will need to be effectively managed. We expect jams along the way, but the magnitude of the policy response is good news, in our view.
That said, the timeline for the market will ultimately be dictated by advances in new virus cases. Therefore, we think market volatility will continue as news on that front comes in. In other words, we've cleared a few trees, but we don't think we're out of the woods yet. Markets will need to time to catch their breath. We'd note that strong rallies often occur within bear markets. For example, the S&P 500 rose 24% from November 2008 to January 2009, but volatility persisted for another two months in 2009 before the market began its sustained rebound1. Broadly, investors today should find some encouragement in the fact that 1) there is some good news out there and 2) markets will, in our view, grow increasingly willing to look to better news ahead as we make progress through this health care crisis.
Sources: 1. Morningstar Direct 2. Bloomberg
Craig Fehr, CFA
|Dow Jones Industrial Average||21,637||12.8%||-24.2%|
|S&P 500 Index||2,541||10.3%||-21.3%|
|10-yr Treasury Yield||0.69%||-0.3%||-1.2%|
Source: Morningstar, 03/27/2020. *4-day performance ending on Thursday. Past performance does not guarantee future results.
The Week Ahead
Important economic data being released include consumer confidence on Tuesday, the manufacturing Purchasing Managers' Index on Wednesday and the March jobs report on Friday.
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