Stock market looks beyond current challenges
The stock market is a fickle beast.
From Feb. 24 to March 23, the Dow Jones Industrial Average fell 10,400 points, losing 36% of its value. Likewise, the S&P 500 lost 1,100 points (33%) while the tech-heavy NASDAQ fell 2,715 points (28%).
The punishing sell-off was triggered by the Feb. 24 World Health Organization report that showed the number of COVID-19 cases outside of China had suddenly spiked by nearly 50%. This report conveyed to the global markets that this new virus was no longer just a Chinese problem. As the number of global cases surged and as government-mandated shutdowns and quarantines became the norm, the stock market plummeted on the projected economic fallout to the American and global economies.
Since then, the stock market has been on an impressive two-month rally. As of Thursday’s close, all three indexes had recovered most of their initial sell-off. In fact, the S&P 500 is now just 10% off its all-time high set on Feb. 19. Even more impressive, the NASDAQ is only 4% off its all-time high, also set on Feb. 19.
Without question, the COVID-19 virus has had a devastating impact on our economy. Economic growth, the labor market, foreign trade and most every key metric of economic health has been brutalized. Given the current state of the U.S. economy, what’s the source of this stock market rally?
The fundamental driver of a company’s stock price is its ability to generate revenues and profits from the sale of its goods and services. Typically, the better the company’s financial performance, the higher its stock will rise. But the stock market is also a forward-looking entity. In other words, despite a company’s current revenues and profits, investors may drive a company’s stock price either higher or lower based on its future financial outlook.
And that’s why stock prices have been rising the past two months. Though corporate earnings are currently being decimated by the COVID-19 virus, investors believe the future outlook for the U.S. economy, and thus American companies, will quickly rebound.
The stock market often serves as a proxy on the health of the U.S. economy. The initial February-March sell-off in stock prices was driven by fear and uncertainty. As the COVID-19 virus quickly spread outside of China, entire sections of our once robust economy came to a grinding halt. But, so far, we’ve avoided the worst-case scenario that triggered this stock market panic – that business closures and quarantines could potentially last for 12 months, or even longer. As evidenced by the two-month rally, the financial markets believe the worst of the COVID-19 virus appears to be behind us and states have increasingly begun to reopen their economies.
Yes, we can rejoice in this rally, but there is a word of caution. It’s still unknown if, or to what extent, this virus can reemerge in the fall or winter. We also need more economic data to better quantify the residual economic damage from this virus. For example, what percent of businesses don’t reopen? What percent of unemployed workers have no job to go back to? Such questions, among numerous others, have yet to be answered.
Once some clarity is obtained, only then can we better gauge just how fast and strong any economic rebound in the second half of the year will be. It will also tell us if this stock market rally is deserved or not.
Mark M. Grywacheski, Investment Advisor
Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets, or developments mentioned.
