False Bottom or Start of Something Big: On This Rally’s Stamina

In the stock market lately, only one thing is constant: speed.

After falling into a bear market at the fastest rate ever, the S&P 500 just recorded its quickest three-day advance in nine decades. As absurd as it may seem, the Dow’s alreadystarted a fresh bull market — up more than 20% from the lows — after more than $2 trillion in value was created in three days.

Is it a bear-market bounce or something more sustainable? Nobody could possibly know for sure. While stocks had surely priced in a huge amount of pain, nothing compares with the coronavirus in terms of shock to the economy. Usinghistory as an imperfect guide, there’s reason to be skeptical — it’s taken stocks an average of 18 months to start to recover after first signs of an economic contraction. But with trillions of dollars of stimulus landing, the case for bottom feeding also exists.

It can’t be stated enough:no precedent exists for the current situation, in which a viral outbreak is killing thousands, has shut down economies and forced people to stay in their homes. This week, the amount of people filing for unemployment insurance more thanquadrupled the previous record. In Washington, Congress is working on passing ahistoric stimulus package.

For every optimist who says we could be witnessing the start of something real, there’s a pessimist to remind you that the largest stock rallies happen in bear markets. Here’s six views on whether or not this epic rally will last.

Sentiment Hasn’t Washed Out

When Emily Roland, the co-chief investment strategist for John Hancock Investment Management, talks to financial advisers, she still hears mixed signals. Some say their clients are petrified, while others are still fielding requests about where and when money should be put to work.

“The bottom will come potentially when we see sentiment completely washed out or everybody totally selling indiscriminately and giving up,” Roland said by phone. “We’re not quite there yet.”

Light At the End of the Tunnel

To John Stoltzfus at Oppenheimer Asset Management, the intermittent rallies over the last few weeks are a signal of where the market really wants to go. Those rallies could be challenged by any negative news surrounding the virus, but there’s a sense of relief over the prospects for fiscal stimulus. It helps that cyclicals and small cap stocks, for instance, are gaining, says the firm’s chief investment strategist.

“The market is placing its vote on cyclicals and momentum and growth, it’s looking towards that,” he said. “It does appear that there is light at the end of the tunnel and it’s likely daylight and not a locomotive coming down upon us.”

Timing Doesn’t Add Up

Normally, a 10% market decline lasts a year, while it takes about 1 1/2 years to recover from a 20% drop, according to Northern Trust Wealth Management. The S&P 500 fell as much as 34%, and only a few days have passed since the bottom. Predicting exactly when the market will bottom is impossible, says Katie Nixon, the firm’s chief investment officer, and investors should be wary of anyone who claims to have the answer.

“For risk assets, the best medicine is time,” she said. “Market timing is notoriously impossible to forecast, and there are too many unknowns at this point. These include, most importantly, when infection rates will begin to decline, as well as the magnitude of earnings declines and the impact of monetary and fiscal policy measures, which is not immediate.”

Congress Went Big

While reported jobless claims Thursday were worse than expected, many investors are hoping the increase will be temporary, says Chris Gaffney, president of world markets at TIAA. What’s important now is that Congress pass its $2 trillion spending bill to help shore up the U.S. economy. More negative economic data will likely challenge the market, but support is coming.

“The stimulus is definitely what investors are looking at versus those horrible weekly numbers,” he said by phone. “Congress went big and I think it’s worked so far for investors.”

Absence of Good News

The expectation of fiscal support is already priced into markets, and going forward, there’s probably going to be a void of good news, according to Lauren Goodwin, economist and multi-asset portfolio strategist at New York Life Investments. Investors still need more clarity on the economic impact of the virus, the extent of credit risk, and assurance the market is functioning smoothly.

“The other thing we need to see before we can move on as investors is addressing the root of the problem, which is at its core a medical problem. I think case numbers have yet to spike in the U.S.,” Goodwin said by phone. “We’re not out of the woods yet.”

Companies Haven’t Fundamentally Changed

To Peter Jankovskis, the co-chief investment officer at Oakbrook Investments, it’s reasonable to expect that badly beaten down companies would bounce back now that stimulus is in sight. As an example, he points to Chevron Corp., which saw its share price cut in half this year.

“There isn’t fundamentally anything that’s change with that company. We’ve just seen a drop in demand for its product and a very well understood reason for that drop in demand,” he said. “With a stimulus package on the way, it’s reasonable to assume the shortfall is temporary.”

— With assistance by Claire Ballentine

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