Over shorter time frames, sentiment can play a large role in guiding the direction of the market. In fact, sometimes sentiment can become so powerful that it causes investors to re-evaluate their pre-conceived notions. Most of the time sentiment stays in a controlled range, never getting too high or low. But during those rare instances when it becomes excessive, it takes on the art of interpretation.
The U.S. stock market has been generally rising since mid-March, settling about 8% lower than it was before the COVID pandemic began to assert itself on American shores. Will it continue?
While we are hopefully starting down the path of recovery from one of the worst economic shocks in our nation’s history, we must continue to be cognizant of the growing divergence between the capital markets and the economy.
This week certainly has the potential to be one of the more pivotal ones we have seen in quite some time. Optimism is continuing to grow around the potential to re-open the economy, with many states, including Ohio, laying out a definitive plan to allow businesses to begin a return to normal. Even though they will be operating under significant restrictions, the psychological boost has been enough for investors to start to imagine the “best case scenario” morphing into reality. Whether or not the return to work plays out that way is yet to be seen.
We are getting closer to a fork in the road as we consider how these facts relate to HCM’s investment strategy. One path contains all the things we have been worried about for the past month and a half. An impending recession with unknown severity and duration, corporate earnings that are expected to significantly contract and historic job losses. Down the other path is unlimited funding and the commitment by the Federal Reserve to support markets regardless of how disconnected stock prices get from the actual economy.
On Thursday, March 26th, we got our first glimpse into how the COVID-19 outbreak was starting to affect the economy. There had been anecdotal evidence of industries having to shutter and business demand slowing, but this was the first meaningful reading and would either confirm or deny the fears that had been building for weeks. Mainly, how bad is it going to be and how will the market react? The Wall St. consensus was for around 700k new unemployment claims, which would have been the highest reading since the beginning of the data set in 1967.