U.S. stocks are in recovery mode thanks to fiscal stimulus, but history shows us the rally cannot be trusted.
On Tuesday, the Dow Jones Industrial Average posted its best daily gain since 1933. Many began to wonder whether the U.S. stock market had finally bottomed. The index looked to be on track for a second day of gains on Wednesday.
Although the mood has indisputably lifted on Wall Street over the past 24 hours, this rally looks flimsy at best—profit-taking is likely around the corner.
Tuesday was a historic day for the stock market as a multi-trillion dollar stimulus package was finally unveiled. The bill will inject much-needed funds into the U.S. economy in order to support Americans after their economy ground to a halt.
On top of that, President Trump said the coronavirus isn’t going to keep the U.S. down for long. He hopes to have the country “open for business” by Apr. 12.
While most projections suggest the number of coronavirus cases in the U.S. will probably be near all-time highs at that point, Trump says he doesn’t want to let the cure do more damage than the problem.
The U.S. stock market’s rally is certainly worth cheering about, but before jumping in with both feet investors should consider the risks. The first of which is economic data about to hit the airwaves later this week.
Unemployment data will be in the spotlight on Thursday as jobless claims are seen surging to record highs. Goldman Sachs sees claims rising by 2.25 million, putting the figure at a historic high that surpasses levels seen during the 1982 and 2007-2009 recessions.
Unless economic data hold an upside surprise, traders can expect more volatility in the market in the days ahead. The economic consequences of coronavirus are still largely unknown, which will likely keep a lid on a prolonged stock market rally.
As CEO of Pepper International Carol Pepper says, this rally can’t be trusted as along as Covid-19 cases are still on the rise:
We still need to see a slowing of the virus cases and a peaking in the U.S., because until then we’ll have these huge relief-rally days — then we’ll get a scary day and the market will plunge down again
The scary days that Pepper is referring to are coming, especially as Donald Trump encourages the resumption of normal life sooner than anticipated.
Even if the U.S. carries on with its lockdown measures, the virus is likely to continue spreading at an alarming rate. That’s because travel in and out of New York, the worst affected state, has been largely unrestricted up until this point.
New York is on par with Italy, whose lockdown has been in place for several weeks now.
Travel in and out of Italy is severely restricted and has been over the past few weeks. People who traveled to Italy were told to self-isolate as early as February when the number of cases were less than half of where they are now.
In New York lock down measures have only just begun. On Tuesday, the White House asked people who’ve been in New York City to self-quarantine.
As hedge-fund manager David Tepper put it, “there’s nothing wrong with nibbling” at stocks right now as long as you understand the risks.
History shows that the stock rally on Tuesday will probably be short-lived. Back in 2008, the S&P 500 made its way 11.6% higher in just one day. The index saw another 10.8% rise on Oct. 28. Five months later, the S&P 500 had lost another 30%.
If that’s anything to go by, the next few weeks will be packed with dead-cat bounces and falling knives.
As the economic impact of coronavirus becomes more clear, investors are likely to start panicking again. This time central bankers and government officials won’t have any tools left to ride to the rescue.