The markets have experienced a bit of optimism in the past week or two. However, most Wall Street firms make a fairly convincing case that the recent rally is a feint, and not the true end of the bear market. This is because investor sentiment hasn’t bottomed out and (most importantly) we haven’t really gotten a handle on the core reason of the crisis – the novel coronavirus and the new disease it causes, COVID-19.
So why has the market rallied at all? Let us look at what the sources of optimism are. First, the next week is likely to be the deadliest time of the outbreak’s first wave. Investors, as we’ve noted before, are forward looking and likely to be focused on what’s coming next. To assuage investor sentiment, things don’t have to get better; they just have to not get worse.
Second, while lockdowns are economically painful, they are having an effect on the virus’ spread. There are reports that both Spain and Italy, two of the hardest hit nations in Europe, are seeing a marked slowdown in new cases. New York City, the current epicenter of the US outbreak, is seeing a flattening plateau of new cases and deaths due to COVID19. An engaged public, serious about lockdowns, quarantines, and social distancing will change the reproduction number of the contagion. A lockdown won’t solve the real problem, but it buys time for the scientific and healthcare community to compare treatment options and improve testing capabilities.
Third, from a financial standpoint, investors have been somewhat pacified by the actions of the Federal Reserve, other national banks, and fiscal commitments across the globe to directly support workers in the face of forced lockdowns. Again, it doesn’t solve the problem, but it buys time.
Time will tell how wisely our national institutions are using the time we are all buying. As lockdowns are ultimately relaxed, hopefully we will have the resources to begin widespread contact tracing, antibody testing, and better treatment options in the months to come.