Brendan McDermid | Reuters
It might be premature to declare the bear market dead, but Thursday’s action sure checked off some important boxes.
Conventional Wall Street wisdom is that bear markets, or 20% declines from 52-week highs, die on bad news, and Thursday featured some of the worst the U.S. economy has ever seen.
Nearly 3.3 million Americans filed initial jobless claims for the week ended March 21, marking the worst week ever, by far. The second-worst number came during the 1982 recession, and the report released Thursday more than quadrupled that total.
Yet the market rose, violently so, at one point hitting 20% off the recent lows, which would define a bull market. That came just days after the longest bull market in history took the quickest fall into bear territory ever.
The thinking about bear markets dying on bad news is that the market is always looking ahead, and when it fully prices in all of the awful stuff out there, the selling will stop even if current conditions look bleak.
There wasn’t much sense to be made of the move Thursday, but it did spark talk that the worst of the market damage from the coronavirus crisis could be over.
“The markets and the economy don’t run in parallel. The market’s running way ahead of the economy,” said Randy Frederick, vice president of trading and derivatives at Charles Schwab. “The markets don’t care about what’s happening today, the market cares about what’s happening six months from now.”
If that’s true, then it makes some sense that the market, as measured by the Dow Jones Industrial Average, is rallying after falling some 37% from its historic peak set in February.
‘Indiscriminate selling’ is over
Economists are expecting a steep fall for the economy in the second quarter that could exceed a 20% GDP decline, with some 10 million people out of work and an unemployment rate higher than anything the U.S. has ever seen.
The jobless claims data offered the first test of whether investors would be willing to look through the bad readings and continue buying. There was some speculation that one of the reasons for the rally Thursday was that the number, while much higher than the 1.5 million consensus, wasn’t as bad as some forecasts of up to 4 million.
For a bottom to start forming “we’ll need to see investors using that term, that it’s less bad,” said Quincy Krosby, chief market strategist at Prudential Financial. “That’s typically what you wait for to begin to invest in earnest instead of just trading.”
Krosby said that market action prior to the claims report had been encouraging as Wall Street saw massive rallies Tuesday and Wednesday as well.
“The indiscriminate selling that you saw in order to raise money has eased, and that also matters,” she said.
A bottom, but maybe not the bottom
While the data is likely to continue to be bad for a couple of months, a pronounced recovery is expected to follow. Federal Reserve Chairman Jerome Powell told NBC’s “TODAY” show Thursday that he sees a “good rebound” in subsequent quarters and pledged the central bank will to whatever it can to ensure that the recovery “is as vigorous as possible.”
That kind of talk is raising hopes in the market.
“I think the market has reached a bottom,” Peter Boockvar, chief investment officer at Bleakley Advisory Group, told CNBC’s “Power Lunch,” though using a long “a” in describing the situation.
“I think all the bad news we’re going to hear about the virus over the next four to six weeks, all the terrible economic data we’re going to see over the next four to six months, that has been priced in,” he added. “The next question for the market is what happens after … we get to the fall and the economy starts to recover? Is it a ‘V’ bottom recovery, or is it something that’s going to take a lot more time? Unfortunately, I’m in the latter camp.”
At that time, Boockvar said, investors have to be reevaluate how much they’re willing to pay for stocks. Will it be the 19 times earnings they were paying just before the market collapsed, or will it be a lesser multiple?
Of course, by then conditions will have changed considerably.
In addition to seeing, hopefully, a coronavirus under control, there will be stimulus in the system unlike anything the world has ever seen.
The Fed has cut short-term borrowing rates to zero and instituted a slew of liquidity infusions that has been valued as high as $6 trillion. On top of that, Congress is on the cusp of passing its own measure valued at more than $2 trillion.
“We’ve got a blank check in the form of monetary policy from the Fed. We’ve not got a blank check, but the largest check ever written by Congress on the fiscal side. The third side is really the medical progress,” Schwab’s Frederick said. “It takes all three of these approaches to solve it. Only two do we have control over. The third is controlled by the calendar and Mother Nature. That’s the tough part.”