- The Dow refuses to be held down by poor economic data because investors believe this downturn is temporary.
- Vaccine hopes are the key to investor sentiment.
- The market is committed to ignoring coronavirus-induced pain and instead have started to focus on the trade deal with China.
It seems impossible that as the U.S. unemployment rate swelled to levels not seen since the Great Depression, the Dow Jones Industrial average continued to stage a rally.
We’re at the tail end of an earnings season punctuated by grim projections and terrible results. But still, the Dow is rallying. What gives?
There are a few factors at play here, but it can be summed up in a straightforward sentiment. There’s a disconnect between the U.S. economy and the U.S. stock market. At some point, the two will align. Whether you believe the economy will rise to join the market or vice-versa is what makes you a bull or a bear.
For now, the bulls are winning that argument, and here’s why:
Vaccine Hopes Underpin the Dow Rally
The way equities are priced today assumes there’s a vaccine coming. In the absence of a coronavirus vaccine, a post-pandemic world looks very similar to the one we’re living in today. A vaccine would allow the world to get back to ‘normal.’
There’s some concern that a vaccine isn’t possible; U.K. Chief Medical Officer Christopher Whitty has cautioned that it may not be possible to immunize against the novel coronavirus.
[Everyone should] be careful that we don’t assume that we are going to have a vaccine for this disease as we have had for, let’s say measles, which once you have it you’re protected for life. Vaccines are looked for, for every infectious disease, they are not found for all of them.
But the overwhelming global effort to find a vaccine has kept the dow afloat. Donald Trump is leading an effort dubbed “Operation Warp Speed” that aims to create 300 million doses of a coronavirus vaccine by January. Gilead’s Remdesivir has been touted as a potential treatment, though the data regarding its effectiveness has been murky. Moderna’s vaccine candidate is moving on to Phase 2 trials.
With so many potential drugs on the table, it’s difficult not to expect a viable vaccine.
Investors Commit to Ignoring Results
Plus, there’s been a consensus on Wall Street that Q1 results are more or less a moot point. Companies like Boeing, whose 737 MAX issues were already plaguing the stock going into the crisis, rise this week. B.A. completed a $25 billion bond deal that will likely keep the firm liquid throughout the rest of the pandemic.
The cash infusion gave investors a reason to be bullish on the stock even though the MAX is still not air-worthy, and coronavirus will likely weigh on air travel for years to come. But Wall Street is committed to ignoring coronavirus related pain, so the stock moved higher.
Apple, the Dow’s most crucial component, managed to deliver an earnings beat amid the pandemic. But notably, the firm, like most of its peers, declined to offer any predictions regarding the quarter that ends in June.
Market Commentator Mike Santoli pointed out that not offering any kind of guidance for a quarter we’re a month into is worrying.
I don’t think it’s necessarily all that bullish that the CEO says, you know, one month into the quarter we’re not even going to give a guess as to what the business looks like for the other two-thirds of this quarter
But on the other hand, a lack of guidance has given investors reason to bury their heads in the sand. If they can’t see it, it’s not there.
China Trade Deal
A big part of the reason the dow has been able to continue rising despite economic uncertainty has nothing to do with coronavirus at all. Over the past few weeks, the trade deal with China has come into focus as the relationship between Beijing and `Washington deteriorates. While rhetoric between the two sides has ramped up, most agree it’s just posturing. Neither side can afford a trade war at a time like this.
As Brown Brothers Harriman’s Scott Clemons points out, the market is used to Trump making outlandish remarks and then reining himself back in, so for now, only the positive side of the relationship between the two is moving markets.
Investors have gotten accustomed to the way the Trump administration floats trial balloons. I don’t anticipate governments will make the same mistake of imposing higher tariffs
Plus, the renewed focus on China’s trade deal has given investors the opportunity to move on from coronavirus. It’s more evidence that the world is moving beyond the pandemic, and it offers a welcome distraction from the dire economic data the dow is dutifully trying to ignore.
Disclaimer: As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.