(Drivebycuriosity) - The economy seems to be in free fall, but the US stock market, represented by the S&P 500, gained more than 30% from the March low. The fast recovery wasn`t a surprise (driveby). Stock markets often snap back after an extreme fall (chart below). It seems there is an invisible rubber band. We observed the invisible rubber band also in the beginning of 2019 when the market snapped back after the Christmas 2018 panic and in the spring of 2009 when the big meltdown turned suddenly into a steep recovery rally.
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( source)
It sounds like a paradox, but the deeper and the faster stocks drop, the faster they recover. This phenomena can easily be explained. In the final phase of a downturn the market often overshoots and the selling accelerates - driven by panic & and intensified 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. The stock market is always forward looking. As soon as the market notices that things don´t get worse it begins to recover. When the news flow becomes less depressing buyers jump back and stocks rally again.
( cnbc)
In March stocks were pricing-in worst case scenarios and seller panicked. There was talk that in the US 50% or more will be infected and everything will be shut down for many months. Since then the curves of new cases, hospitalized & dead persons flattened. In the US the daily growth rate of new cases sank from around 30% - which meant a doubling in about 3 days - to less than 3% and in many Asian & European the daily growth rates dropped to 1% and below. Quarantines, travel bans, the temporary closing of factories & gathering places (pubs, gyms, restaurants, beaches etc), social distancing and cautious behavior (intense hand washing, fewer body contacts etc.) did their work and helped to flatten the curve and constrain the epidemic so far.
The flattened curves encourage some European countries - like Germany, Italy & Spain - and most US states to reopen their economies step-by-step. Governments and health officials are trying to strike a balance between reopening economies and staving off a second wave of infections. There are also soothing news from the economy. Companies like Uber reported that they have seen gradual recovery in the past four weeks and online retailers are experiencing jumping sales.
The stock market is also fueled by the $6 trillion stimulus by the US government and Federal Reserve. Roughly half of American workers can earn more from unemployment benefits than they earned at their jobs prior to the coronavirus shutdown ( realclearmarkets). On top of state unemployment, federal coronavirus stimulus is adding $600 per week. As a result consumers have still a lot of money to spend - keeping the economy alive. The Energy Information Administration reported that US gasoline demand, an indicator for economic activity, is already rising again (aaa ).
Ultra low oil prices & interest rates are also supporting by reducing transportation costs (shops still need to be filled and online purchases still need to be delivered) curbing the costs for those who still are working & commuting or will restart it.
There is also a big fundamental change going on. More people are working, learning & shopping from home which is fostering digitization and raising efficiency & productivity of the economy ( driveby ). Online sales in the US are surging, more people are binge watching Netflix & Amazon Prime, listening via Spotify, reading Kindle books, surfing Facebook & Twitter and businesses are running more & more on cloud computing. Amazon already hired 100,000 people to deal with the exploding demand and Facebook reported explosive demand.
The recent gains on the stock market are also driven by the hope on a v-shaped recovery. There is a chance that the economy will coming roaring back in the second half of the year. 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 & to travel again. Time will tell.
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