Market Musings: Has Mr. Market Gone Mad?

By Andy Willms, President and CEO

The stock market continued its unlikely rally this past week, with all three of the major indexes having risen sharply. The S&P 500 is now showing just single-digit losses on the year. Many are finding the rally hard to comprehend. Has the U.S. stock market (“Mr. Market”) gone mad?

The following chart summarizes the stock market’s amazing recovery year-to-date as of earlier this week:

It's as if investors in the U.S. stock market have all-but-forgotten that we are still engaged in a life and death struggle with the coronavirus, the recent flare-up in the ongoing trade war with China, and that upcoming presidential elections. I realize that the stock market is forward-looking, but that’s a lot to look past.

So, what’s going on here? The biggest driver if the stock market as of late has been the improved prospects for a Covid-19 vaccine. In total, there are 10 vaccines currently in clinical trials and another 114 in preclinical evaluation, according to a tally from Fundstrat. While none of these prospective vaccines has been approved for use in the U.S., and manufacturing the massive quantities of the vaccine that will be needed remains a major hurdle, it now appears to be a question of when, not if, a vaccine can be developed.

There is also evidence that the economy has begun to rebound. All 50 states in the U.S. have reopened their economies to some extent. Spending on the industries most hurt by social distancing hotels, restaurants, airlines has increased. Transportation Security Administration security screening checkpoints has tripled from a low of 87,534 on April 14, to 267,451 on May 24th (although that is still down 87% from the same day a year earlier). Housing demand has already surpassed pre-crisis levels and mortgage applications have risen.

There are signs, then, that if there is not a second wave of Covid-19, the economy has struck bottom and has started to rise. So perhaps Mr. Market is acting rationally after all.

Then again, there are plenty of reasons to be wary. Dr Anthony Faucci director of the National Institute of Allergy and Infectious Diseases, warned on Wednesday that the U.S. a second wave of COVID 19 could hit the country when temperatures drop. Moreover, much of the recent economic improvement can be attributed to the massive amount of government stimulus spending, which has slowed.

Mr. Market is betting on a V-shaped recovery. Whether that bet will pay off depends in large measure on the course the pandemic takes from here.

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