If there’s one thing we know about the stock market, it’s that you never can tell what’s coming next.
The last 2 months have been a prime example. The Dow had plummeted by 37.1% from its February 12 high of 29,551 to a March 23 low of 18,592. But then – surprise! By April 9th it had rebounded 29% to recover 50% of its loss. The rise included a pre-Easter four-day week, April 6–9, when the Dow rose 12.7% to record its best-performing week since 1974.
This may perplex you, given continuing economic woes. Set back in 1982, the record for weekly first-time unemployment claims was 700,000. But during the week ending April 9th there were 6.6 million of the same. Consumer confidence is at a 9-year low. Some are projecting second quarter unemployment rates exceeding 20%, and GDP declines of 40%.
These are crazy-bad numbers. So, why did the market rebound? Because, while the economy is driven by here-and-now numbers, current stock prices are set by future expectations. After all, an investor wants to buy low today, and sell high in the future.
On what forward-looking optimism did the recent rally pin its hopes? I see at least four things that need to go right to achieve a real recovery. We need to:
Receive massive Federal financial support. You can check off this box. Funds are beginning to flow pretty freely to individuals and business, large and small.
Flatten the COVID-19 curve. It’s a little early to tell, but this box also appears to be checked.
Re-open the economy safely and quickly. This will be tricky, but plans seem underway.
Keep inflation in check. The Federal government will need to recapture a lot the fuel (cash) it’s thrown on the economic fire to keep it stoked.
It will be interesting to see how all this plays out. However and whenever it does, I do firmly believe the economic and business worlds will eventually regain their footing. And in exchange, our stock markets will reach new highs to continue their upward trendline.
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