The Other Side of the Valley
Even as the number of new cases and deaths from Covid-19 continue to rise globally, the stock market is beginning a comeback. Indeed the S&P 500 has risen 28% since the market bottom on March 23rd as investors look past today’s headlines of terrible unemployment claims, disappointing earnings and new infections to ‘the other side of valley’, anticipating the reopening of the global economy and growth.
The stock market is always forward looking but this fact is never more obvious than in times of crisis. Stocks will fall quickly on news of the crisis and then rise before the crisis is fully over. For example, during the 2008-2009 financial crisis, we can see with the benefit of hindsight that the economy bottomed in June of 2009, while the stock market bottomed 3 months beforehand in March of 2009.
In the Coronavirus crisis stocks dropped precipitously even before infections spiked and businesses closed. Now investors are anticipating the end of the pandemic and the reopening of the economy despite the current bad news. Indeed, the dismal economic data continues to set records as 22 million Americans have lost their jobs and the national unemployment rate is likely 18%. The U.S. is almost certainly in a recession and U.S. GDP is expected to collapse in the 3rd quarter to -5.5%.
However, investors can also see that, given the current trends in the virus, that economic growth is likely to return in the second half of the year. Therefore, the market can look across the valley of bad news and begin to price in the recovery even amid our current situation.
As we discussed during our recent investor conference, based on research by Goldman Sachs, stock bear markets that are ‘event’ driven declines tend to be much shorter duration, characterized by steep drops and quicker recoveries when compared to cyclical or structural stock market declines. So far, the Coronavirus crisis appears to be tracking in that path.
Of course, the path to recovery will not always be smooth and there will almost certainly be setbacks along the way. Nonetheless, the current recovery does make sense and is a hopeful sign that we will get through the crisis and back to growth once more.