These indicators suggest a stock-market bottom, but coronavirus fears could send the S&P 500 swooning again.
U.S. stocks rallied with an impressive rebound in the past week as the Federal Reserve and Congress have delivered unprecedented fiscal and monetary stimulus aimed at dampening the blow the coronavirus epidemic has dealt to the U.S. economy.
The question investors must now ask themselves is whether or not the equities market has already hit the bottom of this bear market or whether investors should prepare themselves for worse to come.
While most investors and analysts interviewed by MarketWatch agree that a retest of Monday’s lows — when the S&P 500 closed at 2,237.40 — are possible, if not likely, they remain split over whether stocks have more to fall.
The single most important variable is the ultimate duration of the COVID-19 pandemic and the shutdown of swaths of the economy to restrict its spread.
It the estimations that the coronavirus will peak in the next two weeks will we see the markets have aggressive moves to the positive side?
“We have no idea how long this will be,” said Yousef Abbasi, global market strategist for U.S. institutional equities at INTL FCStone said. “Right now, fundamentals don’t matter because there is very little clarity as to when the economy can restart — and depending on how long this goes — what the economy will look like when it does restart.”
These uncertainties aside, there are several indicators that bolster the case that a recovery for the stock market may have begun, said Michael Arone, chief investment strategist at State Street Global Advisors.
“The severe indiscriminate selling we saw prior to last week has abated,” he said, noting that through last Monday, nearly every asset class, including gold, U.S. Treasury bonds and stocks were being sold off. “It was that classic capitulation move to cash,” whereas in more recent sessions, bonds have rallied when stocks retreated and vice-versa, typical of normal behavior in financial markets.
Will the Federal Reserve Actually Start Buying US Stocks?
Should conditions on Wall Street deteriorate significantly, the central bank could go where it’s never gone before, into the equity market where it would take a passive interest in the performance of stocks, according to market analysts and economists.
Interviews with a variety of market pros over the past week showed that the idea of the Fed venturing into the stock market seems anything but far-fetched.
The Fed already has unloaded an unprecedented level of ammunition against the tumult brought on by the coronavirus, so doing more would take it even further into uncharted waters.
The Fed would need congressional permission to extend its operations, but already has received wide latitude from the Treasury Department through emergency provisions in the Federal Reserve Act.
“If there were any major dislocations, it is clear that they will go into whatever nook and cranny in the market that starts to choke,” said Quincy Krosby, chief market strategist at Prudential Financial. “We know that when you have choking in one part of the market, you have choking in another part of the market that leads to dislocation. As soon as you cross that line, you are now facing something else that you could conceivably buy.”
Indeed, the Fed already has shown a willingness to go beyond its financial crisis response, and it may have to do more if if the crisis worsens.
Cheapest gas ever and no place to go!
With 3 billion people in lockdown, global oil requirements could drop by 20%, International Energy Agency head Fatih Birol said, according to a Reuters report on Friday.
Oil prices fell to the lowest in more than 17 years as demand plunged as a result of the pandemic and an unrelenting price war between Saudi Arabia and Russia showed no signs of easing.
“Russia and Saudi Arabia show no signs of compromising in their standoff over oil supply,” National Australia Bank’s Rodrigo Catril wrote in a Monday note.
“We think oil supply from the US, Canada and China are the most likely to be curtailed at low oil prices. US oil production cuts are expected to be the most significant,” Vivek Dhar of the Commonwealth Bank of Australia said in a note on Monday. “The plunge in US oil rigs last week signals the pressure facing the US shale oil sector.”
Countries have gone into lockdown due to the coronavirus pandemic, with flights all over the world canceled as airlines ground their planes, hitting economic activity and fuel demand. That has led to excess supply flooding the market as well.