TOPLINE
Stocks have skyrocketed since their coronavirus low in late March, but experts are now warning that dismal economic data and lackluster corporate earnings are reasons to be skeptical of the market’s latest rally.
There are reasons to doubt the stock market’s latest rally, experts say.
Mark Lennihan/ASSOCIATED PRESS
KEY FACTS
April was the stock market’s best month in over 30 years with the S&P 500 gaining 12.7%, the Dow 11.1% and the Nasdaq 15.5%.
Despite the market’s optimism, a host of recent and very sobering economic data is showing just how badly the coronavirus has wreaked havoc on the U.S. economy: GDP contracted 4.8% last quarter—the biggest drop since 2009—and the worst is still to come.
“The current disconnect between stock trends and GDP may be because extraordinary policy (fiscal and monetary) measures have bolstered confidence for investors but not consumers,” says Lindsey Bell, chief investment strategist for Ally Invest.
While these actions could help support the economy, “eventually roads converge, and markets will need to reconnect with the economic fundamentals,” she says.
What’s more, with corporate earnings season well underway, many companies are also disclosing the damage the virus has done; Even some of the biggest companies in the world, such as Apple and Amazon, have felt the impact.
Of the 275 companies in the S&P 500 that have reported earnings so far, only 67% have beat expectations while almost 29% have missed (over the last four quarters, 74% beat estimates and 19% missed on average), according to Refinitiv.
But some experts are still hopeful: “The market is clearly looking beyond the current quarter,” and while a lot of bad news has come out, “none of this was a surprise,” says Chris Marangi, co-chief investment officer at Gamco.
“I have more confidence in the rally today than I would have before we got incremental data from a lot of companies during earnings season,” he says.
Crucial statistics
The coronavirus market sell-off, which began February 19th through to the low on March 23, was the fastest drop of more than 30% on record for the S&P 500. Then, markets rallied through April, making it the shortest bear market on record at just 33 days. According to data from Bespoke Investment Group, out of 25 prior bear markets, the S&P retests previous lows and hits an even lower price level 60% of the time.
Chief critic
“The narrative around reopening and Remdesivir is simply too enthusiastic,” says Vital Knowledge founder Adam Crisafulli. The world is much better than it was in March, he admits, but this is already reflected in the market. “The most acute phase of the crisis is over, but the ramifications of the economic shock will last for a while longer.”
CRUCIAL QUOTE
Investors should be “careful” after the market’s recent rally, “as a well-deserved break could be perfectly warranted,” says LPL Financial
LPLA
Further reading
Stocks Fall, Dow Loses 600 Points After Trump Threatens New Tariffs On China (Forbes)
These Stocks Will Thrive In A Post-Coronavirus World, According To Experts (Forbes)
Another 4.4 Million Americans Filed For Unemployment, But The Worst May Be Over, Experts Say (Forbes)
Full coverage and live updates on the Coronavirus