What Does the Bond Market Know?

By Nicholas Jasinski |  Tuesday, April 28

Still Optimistic. Most U.S. stock indexes closed in the red today, but beneath the surface investors were still decidedly betting on a rapid recovery for the U.S. economy. Several states have announced plans to lift stay-at-home orders and allow nonessential business to reopen in the coming weeks.

After opening at their highs of the session, the major stock indexes fell through the morning and spent the rest of the day near the break-even line. The Dow Jones Industrial Average ended the day down 33 points, or 0.1%, after being up over 300 points. The S&P 500 and Nasdaq Composite fell 0.5% and 1.4%, respectively.

The small-cap Russell 2000 index, meanwhile,  added 1.3%  for its fifth-straight gain. And industrials and materials sectors stocks were among the best performers in the market today, up 1.9% each. Energy and financial shares also rose. 

The prospects for small caps and those sectors are closely tied to the health of the economy, and they're seen as riskier than the broader market. If a quick economic recovery is in store, those types of companies could have the most to gain. That’s still a very big “if,” however. 

Health care and technology stocks were among the biggest losers today, down 2% and 1.3%, respectively. They're seen as best equipped to weather a prolonged coronavirus downturn, and could see lower relative returns if the crisis passes sooner rather than later. The Nasdaq Composite was heavily weighed down by both sectors today.

The S&P 500 has now bounced 28% from its March 23 low, and is down just over 11% this year. Those betting on a quick recovery seem to be winning out for the time being, but the bull-bear debate rages on.

Optimists see people and businesses quickly adapting to serving customers and producing goods while maintaining six feet of distance. Cruise lines, movie theaters, and sports venues may not snap back any time soon, but most other businesses will be able to adjust to the new normal.

Plus, trillions of dollars of fiscal and monetary support could keep many businesses afloat that would have otherwise failed. And the hunt for a Covid-19 vaccine and treatment is progressing rapidly, with promising—albeit early—signs from a variety of projects across the globe.

On the other hand, even as states and countries begin the gradual process of allowing nonessential businesses to reopen and employees return to work, the economic pain caused by the coronavirus pandemic will likely last for years. Many businesses and companies will still go bankrupt or face acute financial stress in the coming months.

And allowing people out of their homes en masse could inevitably lead to a second wave of infections resembling the initial outbreak regardless of new protective measures. Until a vaccine is developed and can be produced at scale, life and work won’t fully return to its pre-coronavirus ways.

The problem confounding investors is that both the bulls' and the bears' arguments seem equally plausible today.