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

On top of a general demand destruction in business, the hospitality businesses around travel and leisure have been destroyed. The mandatory closures throughout much of the nation have restaurants and bars effectively closed, hotels and airlines have almost zero demand, and cruises are shut down. Malls are abandoned, retail is shut down except for the non-essentials businesses, and there is not even any live sporting events and no public events of any sort to watch. If the economic numbers looked bad for March, April’s numbers will resemble an economy that has large portions of the population that have simply vanished.

As for the stock market, many technicians and strategists have pointed out that bear markets and recessions require a retest of the lows. In 2008 and 2009 that happened, and the bottom of the stock market took several months after the Lehman Brothers collapse and the passage of the TARP and public mortgage bailouts before happening. And after the 9/11 terror attacks of 2001, stocks did not bottom out for another year before finally recovering.

It is widely expected that the earnings season for the first quarter of 2020, and likely the second quarter, will be atrocious. With the exception of businesses that benefit from the stay-at-home and work-from-home economy and those that have a coronavirus fight to their model, an overwhelming majority of companies have formally suspended or withdrawn guidance. Banks are now expected to be under pressure in a worse scenario than most of the stress tests have provided for, and they have suspended stock buybacks and some are expected to cut or suspend their dividends. There was a brief period in the panic where investors even worried that the safe-haven utilities and Dividend Aristocrats were at risk of dividend cuts (or worse).

After all the negative that has been seen, what if things just were never as bad as they seemed? Some market strategists have already called a bottom in the stock market. Others believe that a retest will definitely come because the atrocious news has yet to be factored into the economy. The Small Business Administration efforts to get forgivable loans to struggling businesses to maintain their payrolls have yet to filter back into the economy at all. It is also widely expected that the Federal Reserve or other efforts will be made to add further stimulus if the current stimulus fails to support the economy.

There is a reason that the stock market and the financial markets are so hard to understand. They all have a serious degree of “price discovery” speculation that looks to predict where the economy and where the world of finance will be in the coming quarters rather than just the headlines of that day. Markets react to news each day, sometimes reacting to the same bits of news each time it comes out. And the “efficient market hypothesis” where everything is adequately priced into the markets has proven to be more of a myth over time because the market is never able to find equilibrium and it always swings up too high and down too low.

There is something else that needs to be considered. The more and more smart money investors who expected a retest may have created a paradox where the retest of the low wasn’t going to happen because too many people were expecting it. The harsh reality is that all of the recessions and bear markets have been brought on by different factors. Is it now likely that we may all find out that the recovery patterns of recessions and bear markets are all going to be unique as well?

It is impossible to know how this all plays out for the economy and the stock market’s move in the coming days and weeks. There are still hopes that the pandemic will start to fade away, and there is already talk of how to get the economy back up and running as the coronavirus cases begin to fall sharply. There is also still a lot of bad news that the markets are going to have to deal with in the weeks ahead.