Massive Monday Rally
The stock market exploded to the upside on Monday as many of the riskiest stocks in the market rose over 20%. You can say these stocks aren’t as risky as they appear because of cheap valuations, but they are cyclical stocks directly impacted by COVID-19. Examples include MGM Resorts which rose 22% and Nordstrom which rose 24%. It’s impossible to list all the stocks that were up huge because there were so many. 8 stocks in the S&P 500 alone rose more than 20%. Only 2 stocks in the Nasdaq 100 fell.
It was a glorious day for the bulls who have been having very tough Mondays in the past few weeks. Stocks rose because the number of new COVID-19 cases has been plateauing in the past few days. Just because we see a plateau in America, doesn’t mean the shutdown is over though. Italy peaked on March 21st and it’s not even close to reopening. That’s because the number of active cases keeps rising.
For the number of active cases to fall, there needs to be an increase in outcomes (recoveries or deaths) and a decrease in new cases. We’re getting close to that point, but we aren’t there yet.
Will Stocks Fall Back Down?
Bulls will say that stocks won’t give back those gains this time. Stocks will likely slowly rally in the next few weeks. That is, unless there is more negative news such as shutdowns extending a few months or signs of the virus coming back in the fall. We need reasons for stocks to fall which is different from a few weeks ago when the only hope for a rally was a treatment that cures patients with coronavirus.
Personally, I think by the time the economy reopens the stock market is going to be within a few percentage points of its record high because the Fed is stimulating financial markets. Therefore, you should buy stocks now.
That being said, many are not as bullish as previously now that stocks had a massive run on Monday. We're especially more cautions in the near term. The table below shows future returns following 7% or more gains in the S&P 500 since 1929. As you can see, in the following week the median return is -1.07%.
It wouldn’t be surprising if stocks stabilize before moving higher later in the month. That being said, many are much more bullish than the median loss of 2.26% in the following 3 months after 7% gains in one day. Stocks will likely be higher in the next 3 months.
Details Of The Big Gain
Gain on Monday was intense. S&P 500 rose 7.03%. I know we’ve had a few of these recently, but it’s still a huge deal. Dow was up 7.73%. That was its 22nd best day ever, going back 124 years, yet it was only its 3rd best day in the past month. In the past 28 trading days the Dow was up or down less than 1% only twice.
We can expect the market to calm down as the number of new cases stabilizes. Once that occurs, uncertainty will wane. We’ve already seen uncertainty declining with the big drop in the VIX. VIX fell another 1.56 points to 45.26. Also VIX fell 29% last week. It was the largest weekly implosion since right after the November 2016 election and after Brexit in June 2016.
Nasdaq was up 7.33% and the Russell 2000 was up 8.24%. Regional banks exploded higher as the KBW regional bank index was up 8.33%. Only sector that didn’t have an amazing day was consumer staples. Yet it still managed a 3.92% gain which would make it the leading sector on most days. Energy was up 5.15% even though oil fell. To be fair, energy stocks fell on Friday while oil rose.
Best sectors were tech and utilities which rose 8.78% and 7.85%. Some investors are saying growth stocks are due for a downturn because they never crashed in this bear market. Personally, I won’t be waiting for big cap tech stocks to make new lows. Microsoft and Amazon aren’t hurt that much by COVID-19 and, they are helped by the movement towards working online and staying home. Therefore, these stocks won’t be making new lows anytime soon.
COVID-19 Update
Stocks rose because the number of new hospitalizations in NYC fell on April 4th and 5th. The situation is stabilizing faster than many expected. On April 4th, there were only 679 new hospitalizations in NYC which was down from 994 on April 3rd. According to the health data website, which shows a model Dr. Fauci is using, the peak in hospital resources used in New York will be April 8th and the peak in deaths per day will be April 9th.
According to the betting website I’ve been following, there is a 95% chance there will be between 500,000 and 1 million cases in America as predicted. Furthermore, there is a 62.9% chance of there being under 5 million cases worldwide by April 30th. That will likely rise towards 100% in the next week. Number of new cases isn’t accelerating.
newcasesperday CHART
In Italy there were 3,599 new cases which was the least since March 17th. On April 5th, the number of new cases in America fell from 34,196 to 25,316. It rose back to 30,311, but stayed below the April 4th peak. The chart above projects the number of new cases per day in America will peak near 35,000 in about a week.
The model projects hospital resource usage will peak on April 15th and deaths per day will peak on the 16th. Once it is clear the peak has occurred, in 1-2 weeks there will be discussions about how and when to reopen the economy.
It's unlikely that America will wait that long to reopen because the $600 extra in unemployment benefits only lasts 4 months. If the economy reopens in 1 month, that gives people 3 months to find a job.