The S&P 500, the most popular broad index of American stocks, finished one of its best months in years on Thursday — up about 13%.
No one needs to be reminded of the other economic headlines last week, including a sharp contraction in consumer spending for March, 3.8 million more people seeking jobless benefits and so on.
Confirmed deaths in the U.S. from COVID-19 illness, meanwhile, have shot past 63,000. That kind of national tragedy can even make the bounce back in stock prices upsetting.
It’s not easy to explain why the breathtaking declines in the U.S. stock markets as the COVID-19 pandemic accelerated in February and March was followed by a broad rally much of the way back up. That’s because it’s not easy to understand.
In the case of the closely watched Nasdaq index, even after a rough end of the week it was down only about 12% from its all-time closing high. Meanwhile, the economy only seems to be getting worse.
“The U.S. economy was already experiencing a catastrophe within two weeks of the lockdowns going into effect [in March] and the second quarter will be far worse,” the chief U.S. economist from the firm Capital Economics wrote last week, while reminding clients that the firm’s forecast of overall economic output for the three months ending in June is down 40%, annualized.
The word unprecedented became tiresome weeks ago, so let’s just call this economic collapse something we don’t remember seeing before.
The stock market is made up of pieces of businesses, of course, and what’s important in deciding what they are worth is how well the businesses are going to perform in the months and years ahead, not so much how they did last month.
And the simple explanation for why the markets recovered is that hopefully April was the low point in the coronavirus crisis, and the calendar has already turned to May.
That’s consistent with the best explanation for what’s happened I got last week, which was from Jim Paulsen, chief strategist with Minneapolis investment firm the Leuthold Group. The pandemic-related recession and reaction, he explained, has all been happening at “warp speed.”
In a normal recession, he said, “You have to debate if it’s coming.”
Much like there’s no need to check the weather app on your smartphone for the chance of rain when standing in a driving rainstorm, this time no one had to check any formal measure of economic strength or had any reason to doubt that a painful recession was underway.
So financial-market values reacted at warp speed, too, as the broad stock market measures fell dramatically in just weeks all the while the reported economic data was still good.
But central bankers and government officials also have never acted so swiftly before, either.
Financial assistance legislation that included the Payroll Protection Program was signed by the president on March 27, a few days after the Federal Reserve announced it would use its “full range of tools” to support households and businesses through the economic storm caused by the pandemic.
The day of the Fed’s statement would have been a good day for traders to buy U.S. stocks, as that week marked the recent low point.
In the meantime, though, there continues to be nothing but bad economic news.
Last week, there was an almost unbelievable number reported for a contraction in spending on services in the first quarter, particularly given the broad public health measures like “safer at home” didn’t get implemented in big states like California until nearly three weeks into March.
Compared to spending on costly items like cars and business equipment, consumer spending on services is usually pretty steady in economic downturns as people will still go to their haircut and dental appointments. Until this time, of course.
The monthly jobs report comes next week, and the forecasts point to a loss of more than 20 million jobs and an unemployment percentage rate that has shot well into the teens.
As to what could delay or derail a broad economic recovery, it’s really dependent on the course of the coronavirus pandemic and the success of our collective efforts to contain it. That includes adapting to social distancing practices that are going to be necessary for some time.
Economic forecasts are always uncertain, Fed Chairman Jerome Powell said last week, but with the pandemic there is a whole new layer of unknowns.
He didn’t seem to be trying to provide a forecast last week, by the way, just assuring the public that the Fed stood ready to do what it could to support American households and businesses. Yet he pointed out that the recovery might not be a steady pickup in activity from a really bad April, with more bad months in the pandemic potentially lying ahead.
“The main thing is to get into that stage where the economy’s healing, where we have the disease under control, where we don’t, you know, take too much risk of second and third waves and that sort of thing,” he said.
Surges of additional infections, second or third waves as he alluded to, could knock back economic activity as workers and customers stay home again, even if state and local governments don’t once again decide they must require that.
So maybe that’s one way to look at the stock market. It’s far too fickle to be trusted, but its recovery at least suggests that a rocky, up-and-down path ahead doesn’t look most likely right now.
So whether savers have any money in stock funds or not, some recovery in the stock market wasn’t a bad thing to see as an awful month came to a close.