This Dow Jones Rally Depends on a High-Risk Bet That Might Go Bust

April 28, 2020 4:03 PM UTC
The Dow Jones is set to continue rallying as nations ease their coronavirus lockdowns over the coming weeks. But that's still a risky bet.
  • The Dow Jones will continue rallying over the coming weeks as more nations begin or plan to ease coronavirus lockdowns.
  • Growing optimism will be buttressed by the Fed’s “unlimited” QE plan.
  • But any gains the Dow makes in the next month could be lost if relaxations result in a second spike of coronavirus cases.

The Dow Jones is rallying. It passed the 24,000 mark yesterday and is on track to close April with a solid monthly gain. But it won’t stop there. As more nations relax their coronavirus lockdowns, it should continue rising over the next few weeks.

Yet there’s a substantial risk lurking in this recovery. If lockdown relaxations ignite a second spike in coronavirus infections, the U.S. stock market could rapidly erase the gains it’s enjoying right now.

Dow Jones Will Surge Past 25,000 as Lockdowns Ease

The Dow Jones Industrial Average (DJIA) is riding a four-day winning streak. Buoyed mostly by the Fed’s ongoing quantitative easing (QE), it’s already recovered to levels not seen since early March.

The Dow has been in an uptrend ever since the Fed committed to “unlimited” QE. | Source: Yahoo Finance

The Dow has risen by almost 30% since plunging to a low of 18,591 on March 23. That same day, the Federal Reserve committed to “unlimited” QE.

QE explains most of the Dow Jones’ gains since March 23. But the stock market is beginning to ride a second bullish catalyst.

A growing number of nations have begun easing or planning to ease their coronavirus lockdowns. The resumption of “ordinary” business activity will provide a natural boost to the U.S. stock market over the next couple of weeks.

New Zealand began easing restrictions today. Australia started doing the same on Sunday.

France will reveal plans for scaling its coronavirus lockdown back today. The U.K. and Canada will likely unveil their strategies this week. Italy – the original epicenter of Europe’s outbreak -will reopen factories and construction sites from May 4.

Last week, Germany began easing its own lockdown. So did India, where shops are gradually reopening. And in the U.S., states such as Colorado, Mississippi, Minnesota, Montana, and Tennessee revealed last week that they would begin easing restrictions. They join Georgia, Oklahoma, Alaska, and South Carolina, which have already jumped the gun.

The more news like this that comes over the next few weeks, the more the Dow Jones should rise. Particularly since the Fed’s QE is still here to feed any organic market enthusiasm.

The Stock Market Is Looking Bullish, But…

Already, analysts are bullish on the Dow’s short-term future.

Speaking to CNBC, The Leuthold Group’s Jim Paulsen said:

The stock market is increasingly reflecting a restart in the economy as more and more states show a willingness to allow some economic activities to come back online.

Paulsen pointed out that the S&P 500’s April 27 surge was:

led by those segments of the marketplace which are most dependent on an economic restart.

This includes small-cap stocks, high beta stocks, and cyclical sectors like financials.

Source: Twitter

But this growing optimism needs to be countered with some pretty big “ifs.” If the easing of lockdowns results in a second wave of coronavirus cases, the stock market will suffer. Any gains that the Dow makes would be erased.

And if relaxing lockdowns doesn’t actually convince consumers to spend and businesses to go back to work, the stock market could suffer a delayed comedown. It will rally with the relaxation of lockdowns. But if this doesn’t actually improve the economy, it could fall.

Still, there’s reason to believe a second spike of infections won’t happen. Nations like Australia, Germany, France, the U.K., and the U.S. are rolling out contact-tracing apps. These should help to avoid a significant jump in coronavirus cases even as people return to normality.

They should also help the Dow Jones lock in the gains it will make over the next month. If those apps achieve the desired results, anyway.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.

Josiah Wilmoth edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

@_simonchandler_

Markets Contributor for CCN living in London, UK. Has a Bachelor's degree in History and Archaeology from Reading University in 2006, and a Master's in Philosophy from King's College London in 2011. Also contributes to Forbes and Digital Trends, among others. Email me | Follow Me on Twitter | My Website | Muck Rack