U.S. stocks staged an impressive rebound in the past week as the Federal Reserve and Congress have delivered unprecedented fiscal and monetary stimulus aimed at dampening the blow the coronavirus epidemic has dealt to the U.S. economy.
The question investors must now ask themselves is whether or not the equities market has already hit the bottom of this bear market or whether investors should prepare themselves for worse to come.
During the week ended Friday, the Dow Jones Industrial Average DJIA, -4.06% rose 12.8%, the S&P 500 index SPX, -3.37% gained 10.3% and the Nasdaq Composite index COMP, -3.79% rose 9.1%, after each fell more than 30% from their mid-February record highs.
While most investors and analysts interviewed by MarketWatch agree that a retest of Monday’s lows — when the S&P 500 closed at 2,237.40 — are possible, if not likely, they remain split over whether stocks have more to fall.
The single most important variable is the ultimate duration of the COVID-19 pandemic and the shutdown of swaths of the economy to restrict its spread.
“We have no idea how long this will be,” said Yousef Abbasi, global market strategist for U.S. institutional equities at INTL FCStone said. “Right now, fundamentals don’t matter because there is very little clarity as to when the economy can restart — and depending on how long this goes — what the economy will look like when it does restart.”
These uncertainties aside, there are several indicators that bolster the case that a recovery for the stock market may have begun, said Michael Arone, chief investment strategist at State Street Global Advisors.
“The severe indiscriminate selling we saw prior to last week has abated,” he said, noting that through last Monday, nearly every asset class, including gold, U.S. Treasury bonds and stocks were being sold off. “It was that classic capitulation move to cash,” whereas in more recent sessions, bonds have rallied when stocks retreated and vice-versa, typical of normal behavior in financial markets.
Another potential sign of a market bottom is action in currency markets, where the U.S. dollar has lost value in recent sessions after the Federal Reserve made aggressive moves to lower the cost of borrowing dollars and increase liquidity. The ICE U.S. dollar index DXY, -1.05% , which measures the value of the greenback relative to a basket of six major peers, fell 4.4% during the week ended Friday.
Arone cited other internal-market factors, including a contraction in the number of stocks trading at their 52 week lows, a weekly decline in the CBOE volatility index VIX, +7.44%, the firming up of global stock markets — including the Stoxx Europe 600 SXXP, -3.26% and the Nikkei NIK, +3.88% — and commodity prices BCOM, -0.96% as signals the worst may be over.
These indicators could also turn south, however, if investors perceive that risks to the economy from the coronavirus epidemic will rise significantly more. “The market can rebound aggressively, if the expectation is that this is a one or two quarter event,” said Marc Pfeffer, chief investment officer at CLS investments. The risk is that the COVID-19 epidemic lingers and requires prolonged or multiple government interventions to prevent an unmanageable public health crisis.
“The market went down quicker and should rebound quicker than the actual economy, but the opening up of the economy is going to take time,” he added. “When you reopen a business after a long closure, it doesn’t mean on day one that the clients come back right away or that you’re prepared to run at full capacity.”
Others argue that the unique catalyst of the current slump in stocks should cause investors to set aside metrics that have predicted previous bottoms. “Another 10% to 20% decline is not out of the question, especially considering the growing number of disparaging forecasts and the crisis in confidence of governments,’ said Brian Belski, chief investment strategist at BMO Capital Markets.
“Given the irrational and fear-laden nature of the current stock market, historical precedents and traditional bottoming signals carry little weight,” he added. “This means we have to stop hearing about coronavirus every minute and we have to stop being irrational with respect to the fear and rhetoric surrounding it,” before calling a market bottom.
The coming week will provide a test for investors with several U.S. data points set to be released that will paint a picture of how the U.S. economy has fared in the early stages of the epidemic. “Bad numbers are better than no numbers at all,” said State Street’s Arone. “Fear of the uncertainty drove prices way, way down. Even if we get numbers, and they’re terrible, it will be valuable information and if the market can withstand it, that’s bullish.”
Markets will likely overlook more backward looking data, including pending home sales for February, due Monday, Tuesday’s Case-Shiller home price index for January, February construction spending and factory orders, to be released on Wednesday and Thursday, respectively.
More pertinent will be The Conference Board’s consumer confidence index, scheduled for release Tuesday and IHS Markit’s and ISM’s manufacturing purchasing managers indexes for March, due on Wednesday.
Wednesday will also feature payroll firm ADP’s estimate of private job growth in the month of March, while Thursday will bring an estimate of new applications for jobless benefits for the week ended March 28, and Friday will feature the closely watched nonfarm payrolls report, which will give markets the first inkling of the extent of the damage being dealt to labor markets.
On the earnings front ConAgra Foods Inc. CAG, +0.25% and McCormick & Co. MCK, -4.53% will issue reports on Tuesday. Thursday, Walgreens Boots Alliance Inc. WBA, -3.66% will issue results and Constellation Brands Inc. STZ, +2.98% will report Friday.