(Newswire.net — April 13, 2020) — The spread of COVID-19 across the globe has crushed riskier assets. Stocks have followed a typical bear market where prices tumbled in nearly a straight line, down 30-40%, and then bounced more than half that amount before beginning to consolidate. As investors attempt to figure out where stocks will move next, the focus will turn to how long it will take for each country to open its economy.
What Has Happened in the US?
In the United States, the Dow Jones and S&P 500 index have rebounded from their March lows and are consolidating ahead of Q1 earnings. With nobody in business, it’s understandable that earnings in the first quarter will be horrible. Additionally, the economic backdrop is a disaster. Approximately 10-million people have applied for unemployment in the last week of March and the first week of April and then the drumbeat of job losses will likely continue throughout April. While the economic picture remains bleak, stock market participants are more interested in determining how long it will take before parts of the US economy begins to reopen.
Unfortunately, nobody has a crystal ball and there is no vaccine to make people feel comfortable. Additionally, government officials are setting competing targets. President Trump has pushed his expected date of reopening the economy to the end of April. He says he is playing cheerleader and his constituents want an optimistic outlook. Other leaders, like Virginia governor Ralph Northam of Virginia, has canceled the remainder of the school year and imposed a shelter-at-home order through June 10, 2020.
What Does the Market Think?
The market appears to be focusing on the summer months. If the United States can come up with an immediate testing kit, the country might be able to start bringing certain groups back. This could include young people who are less vulnerable to virus symptoms. This could also be in areas that are less affected by the spread of the virus. Hotspots, like the tri-state area around New York City, Detroit, and New Orleans, would remain on lockdown until the virus fades.
There is a large flattening of the VIX volatility futures curve from June 2020 through September 2020. The VIX curve dropped from a volatility level of 39 to 31, during this period, which likely means that traders believe the markets will calm slightly during this period.
The market also expects the US government to play a critical role in keeping small businesses up and running and employees employed. Small business loans can turn into grants if all the employees at a company with less than 500 employees remain on the books. This will allow jobs to be available when the US finally reaches the other side when the economy comes back.
What Could Happen Next?
Market participants want to know how long it will take for things to return to a “new normal”. This would be a world where some social distancing is practiced, but the “shelter in place” is lifted. Investors do not believe this can happen within the next 30-days but also don’t believe it will take an extended period. As the amount of time that it will take to go back to normal gets extended, stock markets will ease to reflect this extended period. According to the CNBC All-American Survey, American attitudes toward the current state of the economy is worse than the financial crisis and the 9/11 attacks. When it comes to the future, more than 51% of American’s believe the economy will improve in the next year. This is likely why the stock markets are holding steady. If this perception changes and fewer investors believe that the US economy will improve next year, US stock markets will decline to reflect this reality.