Stock Market: Why The Shortest Bear Market In History Ended After Just 4 Weeks

(Drivebycuriosity) - Yesterday the shortest bear market in US history ended - after just 4 weeks, beating the bear market of 1990, which lasted 3 months ( apnews ). Yesterday the S&P 500, the gauge for the US stock market, closed on 2,749.98 points, 22.9 percent above the low from March 23  -   2,237.40 points. A bear market ends and a new bull market starts usually when the S&P 500 gains at least 20 percent. The bear market began on Thursday March 12 when the S&P 500, the gauge for the US stock market, plummeted to 2,480.64 points and finished the day more than 20 percent  below the all-time high from February 19 (actually 26.7%) .

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The fast recovery wasn`t a surprise.  Stock markets often snap back after an extreme fall (chart above). It seems there is an invisible rubber band. It sounds like a paradox, but the deeper and the faster stocks drop, the sooner a bear market ends. This phenomena can easily be explained. In the final bear phase the market often overshoots - driven by panic & accelerated no thanks to short selling. Hedge funds and other speculators borrow stocks only to sell them immediately as a bet on lower prices. But suddenly the panic wave rolls over,  bargain hunters are attracted by sharply reduced prices & valuations, short sellers start buying back, new information dampens pessimism, people become tired of listening to the prophets of doom and panic will ebb down.

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The March crash was driven by a very gloomy sentiment. There was talk that in the US 50 percent will be infected and everything will be shut down for many months. Not anymore. The recovery rally is driven by encouraging news from the COVID-19 front which overrides the grim economic date. In the US and many other countries the curves are flattening (new cases, hospitalized persons, deaths) - thanks to lockdowns, self-quarantines, social distancing, hand-washing etc. Governments are already talking about gradually lifting the restrictions. We are getting reports about the emergence of very effective therapeutic drugs (e.g., hydroxycloroquine, Azithromycin, zinc), many firms & university institutes are working on multiple vaccines and the traditional flu season is ending - thanks to better weather.

The rally is also fueled by the $6 trillion which government and Federal Reserve are pumping into the US economy. There is a long catalogue of measures ( reuters  marketwatch). A lot of US tax payers will receive a direct payment of $1,200, with additional payments of $500 per child. The millions who lost their jobs - or will in the coming weeks - will start getting additional unemployment benefits from the federal government. Small businesses will have access to $350 billion in forgivable loans. There are programs for airlines and other big corporations and much more. And the Federal Reserve started to add about $4 trillion by giving loans & purchasing bonds.

With some luck an economic recovery could start in May. The second half of the year could show an economic boom starting in the third quarter. There is a huge backlog demand. People are tired from sitting quarantined at home, they will be happy to go back to work and to visit shops, bars, restaurants. The recovery will be still be fueled by the $6 trillion stimulus tsunami which works as financial steroids. There also will be strong tailwinds from record low interest rates. Oil prices are still much lower than the start of the year.

The stock market is always forward looking. As soon as the market notices that things don´t get worse - it will recover!