The recent stock market gains were predicated on states reopening. Now what?
The selloff this past Wednesday, when the Dow dropped 700, was in some ways worse than the the Dow plunging by 1800 points a few weeks ago.
So, how is down 700 worse than down 1800? Because when people can't go out because of a state mandate, they still look forward to getting back to normal. But when people decide on their own that they won't go out because they're afraid of contracting Covid, that's a whole different thing. It'll take time for people to get over their fear of Covid. Not everyone, but enough of the American population to warrant a pullback in expectations for an improvement in GDP and corporate profits; near term, anyway. The down 1800 point day was just the stock market's way blowing off steam. The down 700 point days on Wednesday and today mark a delayed reopening based on fear of the disease.
Maybe we'll see a retreat in the number of Covid-positives over the weekend or we'll get some good news on the vaccine front. Either would help stabilize the stock market; even run it back up.
With record Covid-positives in testing, it's not too hard to envision hospitalizations rising. This is happening in Texas, which is why the state just announced a rollback in its reopening. Get out of the bars because they're closing! No more elective surgeries. Restaurants reduced to 50% capacity. Well, believe it or not, those kinds of actions are actually what will make investors feel more confident in the long run. Get the coronavirus under control, the economy will follow.
If stocks rebounded sharply from the March 23rd low on hopes for a fast and successful reopening of the economy, doesn't it make sense that stocks are ahead of themselves if the reopening is delayed? That's the story of the week and it makes perfect sense.
It doesn't necessarily mean that stocks are doomed to make new cycle lows; it just means a new round of price discovery needs to take place before stocks could move higher. After all, we still have the Federal Reserve at the ready to provide assistance to the economy. We also have the mechanics of how the S&P 500 works. It's a market weighted index; bigger companies have a bigger impact on the index. This pandemic is the perfect setup for FAANGM - Facebook, Amazon, Apple, Netflix, Google, (Alphabet), and Microsoft. I have a separate watch list just for these 6 stocks. The represent nearly 30% of the S&P 500, so as they go, so goes the rest of the stock market.
In any event, the Covid surge was somewhat expected in the fall. It's happening now, just a few days into summer. Luckily, it's mostly young people, 35 and under, that are seeing the most dramatic rise in infection rates - if you can even call that lucky. But that's better than nursing home residents. More time is needed to assess the situation, but that won't stop many investors from clicking the sell button.
I spoke about this in Wednesday's live stream of Be the Boss of Your Money. Take a look, below. It explains the about face of the stock market. I'll have a few things to add to it, but that'll be for Monday's live stream, which you could watch every business day at 4:30 PM on LinkedIn, ClientFirst Strategy's Facebook page, and YouTube. You could also watch in the replay on all of those platforms. Here's how to connect with me:
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Thanks and have a great weekend,
Mitch
