Is This the Tiger King of Stock Rallies? Or a Dead Cat Bounce?

The stock market is rallying despite a flurry of bad economic news. 16 million are unemployed. 26,000 Americans have died from the Covid-19 Virus. Shelter in place orders are in place until May, at the earliest.

Any sane person would look at this headline from last Friday and ask “how can this make sense?”

This is what so many people struggle to understand about the stock market: it doesn’t move on the current headlines- it’s trying to price in future ones.

We must remember:

Stock prices change long before headlines do

The stock market dropped over 30% by March 19th, at which time there were only 15,000 COVID-19 cases nationwide and California decided to issue the “Shelter in Place” order.

Most stock investors were probably looking at their accounts & thinking:

Today, there are over 26,000 deaths in America alone, yet the stock market is nearly 30% higher than the low point. Why?

What makes timing stock prices so difficult is that so much future information gets priced in before the headlines can confirm it. Most wall street veterans will tell you stocks move 6-18 months in advance of the news. The stock market is an imperfect mechanism that’s always assigning a current value to future expectations for businesses and the economy. With this said, it would make more sense that prices are beginning to rally as we’re seeing a flattening of the infection rate.

If we thought things would get better, why did stock prices drop faster than your 8th grade paper airplane?

For the stock market, unknowns are really hard. Potentially, the initial drop was a case of pricing in worst case scenarios. We were told Unemployment would skyrocket, businesses wouldn’t be able to get loans, foreclosures would be rampant…the plumbing in the financial system would fail.

Thankfully, the Fed did what it had to do on short order. They eased some of these concerns through increasing unemployment checks, $1,200 stimulus payments to individuals who qualify and small business loan programs.

Buying stocks is, ultimately, a test of faith. Faith that the future will be better than the past. Faith that politicians can be crazy, but businesses will act rationally. Faith that “this too shall pass”.

Stock prices will be low when people lose faith, and high when life is easy. The trick is to realize things will always look bleak when prices are low, and by the time buying stocks is comfortable, the recovery is well under way.

So- what does history say about market rebounds after huge pullbacks? Usually, the first year from the bottom is pretty attractive as life gets back to normal:

Nobody knows exactly where we’re at today, but Blackrock’s data below indicates returns trend upwards after pullbacks of similar size.

While it’s impossible to know if a bottom in stock prices has been put in place, the encouraging medical progress being made against Covid 19, as well as the strong government intervention in support of the economy, should give investors some degree of relief as well as optimism.