The Bull Case For Stocks

By Nicholas Jasinski |  Wednesday, April 8

Optimism. The S&P 500 joined the Dow Jones Industrial Average in a bull market today, up about 23% from its March 23 recent low. Both indexes rose 3.4% today, while the Nasdaq Composite lagged with a 2.6% gain.

The S&P 500 is still off 19% from its record close in mid-February, but stocks are now more-or-less even over the past month. That's a remarkable feat considering all that's happened in the economy and the world since the second week of March—and what still lies ahead.

My colleague Matthew Klein explained in yesterday's newsletter why a return to a narrowly defined "bull market" doesn't mean it's nothing but up for stocks from here. In fact, betting on a pullback might be the better wager. 

Ben Levisohn shared his thoughts about that possibility today:

Ever since the market bottomed and started moving higher, I’ve been working under the assumption that there will be a retest of the lows. That’s largely because that’s how the market works: It sells off when a problem is first identified, rallies as the situation gets stabilized, and then falls again as the economic damage becomes clear. That was what happened in 2008: The market tumbled after Lehman went bust, rallied when TARP and other acronyms helped stabilize the financial system, and then fell again as the economic—and earnings damage becomes clear. I expect the market to follow that playbook again.

Still, the market’s rally raises doubts. I expected a bounce, but not one like this. The scenario that frightens me the most from a markets perspective—only because it would make me look stupid—is that we get a repeat of 1998, when the market tumbled on emerging-market debt concerns, the Fed stepped in, and the crisis passed, and it was off to the races until the tech bubble really popped in March 2000. If that actually happens, it would be glorious.

A 23% rise for the S&P 500 in just 12 trading days might very well be a sign of overoptimism that will revert in the near term. But the 34% drop in the 23 days that preceded it may turn out to have been just as much of a stretch.

As Ben writes, that's just how the market works. Short-term optimism or pessimism tends to overrule long-term uncertainty, and investors can overreact to what happens to be right in front of them.

The Federal Reserve certainly deserves some credit for essentially deploying its entire global financial crisis monetary toolkit in the span of a couple of weeks in 2020—and then going still further. Congress also moved fast: passing the $2 trillion Cares Act wasn't without the standard partisan conflict, but debate didn't drag on for the two months it took to pass a stimulus bill the last time around. And on a local level, stay-at-home orders proliferated, and Americans appear to be heeding them (some spring breakers aside).

Those actions collectively took the absolute worst-case health, economic, and financial-market scenarios off the table, halting the selling fever and restoring reasons for optimism to those looking to buy. And, more importantly, it made the market appear safe to venture back into for those with a long investment horizon and the stomach for some near-term volatility.

The situation keeps changing day by day, and nothing is assured. But a global financial system collapse appears unlikely. Job losses and lost business in the coming months will be painful and take much longer to recover. But a deep and multi-year recession appears unlikely. And the most frightening Covid-19 fatality projections can be avoided if people continue physically distancing themselves from one another, allowing hospitals to handle the surge in patients.

Where exactly the S&P 500 will be next week, next month, or next quarter is likely anyone's guess. But the path higher from here over the next two or three years is a much easier one to get behind today than it was a month ago.