Optimism Is Coming Back in the Stock Market – Will it Last?

Analysts are feeling optimistic that the worst of the coronavirus crisis is over. In turn, stocks surged on Monday. | Image: REUTERS/Mike Segar

• Optimism is gaining the stock market, as COVID-19 cases and deaths are declining globally.
• While lockdown measures appear to be working, we shouldn’t be too optimistic as a second wave of infections might occur.
• Stocks are trading at attractive valuations, but we should stay prudent since more downsides are likely.

Global stock markets surged on Monday as investors are optimistic about slowing global growth in COVID-19 infection and death rates.

Lockdowns Appear To Be Working

Confirmed cases of COVID-19 worldwide reached 1.27 million over the weekend, according to John Hopkins University. But the Deutsche Bank follow-up project shows that the number of new cases registered in the past 24 hours was the lowest in almost three weeks.

The number of deaths from COVID-19 is also decelerating. Saturday was the first day since March 17 that coronavirus deaths have increased by less than 10% globally.

Spain and Italy reported the fewest deaths in more than two weeks. New York State reported 594 new deaths from coronavirus on Sunday, which is less than the 630 recorded on Saturday. This marks the first daily decline in deaths from coronavirus, according to Governor Andrew Cuomo.

But infection rates are still rising in New York. On Sunday, Donald Trump warned of “toughest week” ahead and that “there will be a lot of death.” The U.S. is the country with the most cases at over 330,000.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note:

The U.K. and the U.S. are a couple of weeks behind, thanks mostly to the incompetence of their governments, so daily deaths will continue to increase, albeit at a slowing pace.

Wall Street billionaire Bill Ackman is optimistic:

Marc-André Fongern, head of foreign exchange spot and options at Fongern Global Forex, said:

With the spread of the virus appearing to slow down somewhat, at least in Europe and especially in Asia, risk appetite may improve slightly for the time being.

Stocks are Cheap, But Prudence Is Necessary

We can see that pessimism and fear are fading by looking at the VIX. The volatility index is way off its high of 85.47 reached on March 18.

Morgan Stanley’s chief U.S. equity strategist Mike Wilson said that the worst is behind us for stocks and investors:

With the forced liquidation of assets in the past month largely behind us, unprecedented and unbridled monetary and fiscal intervention led by the U.S. and the most attractive valuation we have seen since 2011, we stick to our recent view that the worst is behind us for this cyclical bear market that began two years ago, not last month.

Wilson said that bear markets end with recessions, they don’t begin with them. Stocks have reached a good entry point for investors on a six to 12-month horizon.

While the stock market is cheap, we shouldn’t rejoice too quickly. Lockdowns appear to be paying off, but analysts warned that loosening them too soon could have severe consequences.

Policymakers must be extremely vigilant and cautious before easing containment measures, or we risk facing a second wave of infections that could be more intense and would prolong the recession. If that happens, pessimism will come back into the world and reflect in the stock market.

Even if there isn’t a second wave, consumers will likely act differently post-virus. They will be more hesitant to travel. They will probably save more. This lower spending will hurt the economy and bottom lines. The optimism we see in the stock market seems to be premature.

So, while stocks are trading at an attractive risk-reward, it’s better to be prudent.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.