Just when it looked as though the market could trend endlessly higher with the explicit backing of the Fed, there was suddenly a spike in COVID infections. Just when the potential valuations for social networking and online shopping stocks seemed limitless, there was suddenly concern about the future. It seems more likely that the declines in the market in two of the last three weeks were not a timeout from reality;
The market’s expressway higher took an abrupt detour last week. The averages had motored higher over the previous three weeks, adding significantly to their recovery gains from the March lows, and relegating the February/March sell-off to a just a speck in the rearview mirror. Analysts were declaring a wide-open road ahead as the NASDAQ Composite Index (COMP) crossed above the 10,000 level and reached new record highs.
Last week the market mimicked the previous weekend’s SpaceX launch, rocketing into the stratosphere. It lifted off on the opening bell Monday and never looked back. The second stage fired Friday morning, fueled at least partially by the surprisingly good employment data. The averages, major and minor, all gapped-up sharply that morning and continued higher into midday when they leveled off, apparently having reached a proper orbiting altitude.
I suspect that not very many people care too much about what I have to say about the stock market this week. Sadly, that may be true a lot of the time, but this week in particular the country has new concerns and worries that have suddenly compounded the dislocations caused by the COVID contagion. It’s not so much the weekend’s demonstrations themselves that are a concern,
For the past five weeks, the big question for the market has been whether the impressive rally from late-March into late-April was the beginning of a new bull market or just a rebound rally in a continuing downtrend. The rally extended far enough to convince many that the lows had been seen, but it failed to climb far enough to invalidate the continuing bear market theory.
The stock market seems to have become comfortably numb to the economic ills that the COVID contagion has wrought. The recent statistical data provided some measure of how much the economy has suffered, but even as that data has worsened, the stock market seems to be feeling no pain. Clearly, the market is looking beyond current conditions to what the future might bring.
Three consecutive gap-up openings to start the week lifted the major averages to record gains (for the month of April) by midweek. It seemed that the promised monetary and fiscal stimulus along with the decrease in the number of new COVID cases domestically and the proposed gradual reopening of our economy were all the market needed to celebrate the hope that a return to normal was just around the corner.
Volatility is coming down. The daily ranges of the market averages are tending to narrow. The market has essentially been trading sideways for the past two weeks. Following the violent swings of the previous two months, a period of relative calm is certainly welcome. But, does this climate change signal the end of the stormy weather, or is it just the eye of the hurricane?
One common tension-inducing gag in old movies was to have the hero, at some point in the adventure, get stuck in quicksand. The audience would be on the edges of their seats as Dash or Lash or Errol sank slowly into the pit. Of course, help would never arrive when the star was merely knee deep in the quagmire. Things wouldn’t even get exciting until he was at least in up to his waist.
The stock market just had its best week since 1974. Over the past several weeks, investors have cycled through a series of high emotions driven by the rapid and dramatic shifts in market valuations: Fear, panic, relief and now confusion. Was the huge rebound over the last few weeks the beginning of a new bull market? Or, was that rally just a brief but spectacular rebound in a continuing bear market?