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.
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.
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