Economy

Should the Stock Market Already Have Recovered Half of Its COVID-19 Recession Losses?

Jon C. Ogg

It was a difficult mental and physical transition to move from an 11 year raging bull market to an instant recession and bear market in 2020. The stock market has to lose 10% for a “stock market correction” and it has to fall 20% for a so-called “bear market.” From the February peaks to the March 23 troughs, the Dow fell by 38.4%, the S&P 500 fell by 35.4% and the tech-heavy NASDAQ fell by 32.6%. Zoom forward just two weeks after the March bottom and suddenly things do not look all that bad.

24/7 Wall St. wanted to look at the recovery that has been seen in the last two weeks to determine if the selling capitulation and the more recent buying euphoria should be the case or not. This may be a sad statement when people are becoming so ill and dying, but using the lessons of history as a guide forward are feeling less than perfect.

Despite millions of jobless claims, despite most of the country being stuck at home, despite a cratering in GDP, and despite the scare of the coronavirus itself, the major stock indexes have now basically recovered half of their losses in just the last two weeks. As of the closing bell on Wednesday, April 8, 2020, the Dow has bounced 28.6% from its low and the 23,433.57 close is now just over 450 points from recapturing half of its losses. The Dow is also now barely in a bear market territory with a loss of 20.7% from the peak.

Things are looking better for the “bear market territory” in the S&P 500 and the NASDAQ. The S&P 500 closed up 3.4% on Wednesday at 2,749.90 and that is a 25.5% gain from its lows in March The S&P 500 only has to get back to 2,792.69 to have recovered half of the entire bear market losses and the S&P 500 is technically not even in bear market territory now that the index is down 18.9% from its peak. The NASDAQ has to now rally just 145 points (not even 2%) and it will have recaptured half of its losses and the NASDAQ is also just in correction now with its shares down 17.7% from the peak in February.

One issue which had made things better for the stock market, and will hopefully help the broad economy in step, is that the U.S. government did not wait to get the economic stimulus and rescue package going. President Trump and Congress were actually able to come together in a dire time of need, even if there is still plenty of finger-pointing and blame on every side.

The financial rescue tally has been identified as $2.2 trillion in aid from the U.S. alone, but that is already expected to be raised under the CARES Act of 2020. That $2.2 trillion also does not count all of those repurchase (repo) agreements from the Federal Reserve Bank of New York to stabilize the Treasury markets, fed funds rates, and even to facilitate smoother currency transactions.

The Federal Reserve was slow to respond initially, but two emergency interest rate cuts took Fed Funds back to a 0.00% to 0.25% range that prevailed for years after the Great Recession. That zero-interest rate policy comes with problems for many segments of the economy and for savers alike, but it is still better than the negative interest rates that are still very much present in Europe and in Japan.

The Fed’s purchases of debt securities has also gone into overdrive, and after coming back down to $3.75 trillion in securities held in September of 2019 that is now approaching $6 trillion (at $5.81 trillion last week) and has blown through the prior peak of $4.5 trillion.

What has been amazing about this latest stock market recovery is that it is looking just as unusual as the fall from grace that was seen from February through March. The only good news about the COVID-19 news reports is that the number of deaths and the number of new cases have started to reach a leveling off in parts of America, while improving in Europe and while China is getting back to work. The numbers surrounding the US coronavirus cases are still nothing short of atrocious. There is no cure, testing remains less than perfect and there is still a controversy about whether or not the drug chloroquine (or hydroxychloroquine) is a good treatment for fighting the coronavirus.

As for the economy, the economic data has only just begun. There were nearly 10 million people who turned in new weekly jobless claims in just two weeks, and we are sure to get an even worse picture with jobless claims on Thursday morning. The official unemployment rate has only just begun to skyrocket and the spike up in March only reflected the data half-way through the month of March. The recessionary numbers seen in services and manufacturing also had the benefit of prior projects being completed, and it’s becoming quite common to see GDP projections of GDP falling more than 20% in the second quarter.