Last Friday (April 17) created relief and enthusiasm in the stock market. The Wall Street Journal even shifted their page one headline from coronavirus to the happy results: “Markets Rally in Face of Downturn.” The subhead excitedly reported, “Fueled by Fed moves, Dow is up 15% in two weeks, despite crisis permeating economy.”
However, there is a problem with this theme, evident in the first two paragraphs (underlining is mine) …
“The Dow Jones Industrial Average staged its best two-week performance since the 1930s, a dramatic rebound that has left many investors with a confounding reality: soaring share prices and a floundering economy.
“The explosive rally is a sign that many are positioning for the U.S. to make a speedy recovery when the coronavirus crisis eases. Investors have been encouraged in recent days by signs that several states will move to resume business, along with hopes that a viable treatment for Covid-19 could be near.”
Okay, first, about that two-week best. It was all due to the previous week – last week was up only ~2%. Moreover, aren’t you getting tired of all such record-breaking announcements (up and down) these past few weeks? Good. You’re halfway to adopting the realistic approach about what’s going on.
Now, about that “speedy recovery.” That is emotion talking. We’re sick and tired of sitting at home, getting inundated with lousy news, but with no real answers to the key questions. Therefore, when a couple of seemingly positive items popped up (Gilead cure! Texas and Florida reopening!), everyone ran toward the light. Finally!
Then reality crept back in — too late to affect Friday’s market close, but there’s always Monday
Now, about the reality behind the Gilead and Florida/Texas news…
After the Gilead Sciences test information was leaked, the company issued the following statement, saying it was premature to draw any conclusion: The “totality of the data [needs] to be analyzed in order to draw any conclusions from the trial. Anecdotal reports, while encouraging, do not provide the statistical power necessary to determine the safety and efficacy profile of remdesivir as a treatment for COVID-19.”
The Wall Street Journal, in its “Heard on the Street” column, discussed the problem this weekend in “Wall Street Overreacts To Gilead’s Good News.” – “A viable treatment for Covid-19 is desperately needed, but investors are way too enthusiastic about the latest potential breakthrough.“
Okay, so what about that other positive: that the U.S. of A. is about to open for business again?
The thought is that since the Florida and Texas governors have announced some form of reopening, they must see the light at the end of the tunnel. Therefore, their actions should lead other states to follow, thereby reversing the pain and suffering, restoring growth and driving the stock market up.
Countering that wishful theory is everything we have learned to date, supported by particularly appropriate weekend write-ups:
First is Saturday’s “Axios AM Deep Dive into Coronavirus” newsletter that leads off with, “The fog of coronavirus.” The newsletter contains the major, pertinent and critical questions and unknowns that, unfortunately, require answering and understanding before any opening can be done without high risk.
One of the key areas that everyone agrees on is the need for more – much more – testing. The Washington Post released Saturday its article, “What we know about delays in coronavirus testing.” It explains where we are now, how we got here and why we are still behind other countries like Germany (which will be partially opening soon).
Numerous other articles cite the shallowness of the testing so far and the need for sizeable increases to understand and project what opening up could lead to. Supporting that view are:
- Republican and Democratic governors throughout the country
- Major company executives
- Professional sports team owners
The reason that latter group is running counter to President Trump’s desire to get professional sports restarted quickly is explained in The Wall Street Journal this weekend in, “Sports Eye Second Wave As New Risk – A fresh surge of cases in September, now packed [with scheduled sporting events], would hit a reeling industry anew.”
“There has always been a second wave in the epidemics that have interrupted American life over the last century, from influenza to AIDS, and top infectious disease experts have been warning for weeks that history will likely repeat itself in the coronavirus pandemic.
“The return of this new coronavirus is the darkest shadow hanging over the future of sports, concerts and every kind of mass gathering that was commonplace before. If there is no second wave, it would break a streak of centuries.
“’Second waves are inevitable in pandemics when you don’t have a vaccine,’ said Carlos Del Rio, head of the global-health department at Emory University, who chaired the panel that guided the National Collegiate Athletic Association to shutting down sports this spring. ‘Any disease when you have an epidemic, when you loosen up prevention, you’ll have a second wave.’
“The question of when American life gets back to normal is not whether there will be another spike in cases, hospitalizations and deaths. Del Rio says it’s this question: ‘How much of a second wave are you willing to tolerate?’”
Okay, enough of the fundamentals. How about that market!
Okay, so let’s see why Friday didn’t confirm an upward trend.
Monday-Thursday (April 13-16)
Clearly a variable, foundation-building set of days for the Dow Jones Industrial Average…
Friday (April 17)
The day that seemingly touched off the optimistic enthusiasm. However, look at the pattern: the 4-day outperformers lagged and the laggards outperformed. That pattern of Fridays reversing the rest of the week is not uncommon, since it reflects traders’ desire to reverse positions held through the week prior to the non-trading weekends.
The whole week
As a result, by using the same -15% to +15% scale we can see the narrowing of the 5-day returns relative to the 4-day ones.
The graphs do not indicate a new uptrend. Instead, they are evidence of foundation-building with a couple of apparently good news items that were actually not.
The bottom line
Ignore the optimism from Friday’s rise. It’s just one more step ahead in the fog of uncertainty.
Think of that Friday move this way: Stocks originally fell 35% because the coronavirus released huge waves of uncertainty through both an unknown virus pandemic and a heretofore unseen economic shutdown. Now look at the DJIA stocks that jumped on Friday.
The pattern looks more like simplistic knee-jerk reactions to doubtful good news, using unrealistic assumptions of recovery while seemingly ignoring all the heavy concerns and uncertainties that make forecasting impossible.
If that seems a bit heavy-handed, remember JPMorgan Chase CEO Jamie Dimon’s description of what the world’s largest bank is doing daily, what the enormous unknowns are and how “only time will tell” what the future has in store. In his mind, “time” is the period through the end of the second quarter.
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