Stocks rise as economic news worsens

The government said on Wednesday that the US economy had suffered its worst contraction since the last recession. The Federal Reserve chief later said he did not know how severe this slowdown would be or how long it would last.

Yet by the end of the day, the S&P 500 stock index had risen 2.7%.

This is the pattern lately. The drumbeat of bad news – one million known cases of coronavirus in the United States, businesses collapsing, unemployment rate could rise to 16% – has done little to deter the rise in stocks.

Since March 23, when the Federal Reserve announced its intention to make unlimited purchases of financial assets to support Wall Street, the S&P 500 has climbed more than 31%. The unlikely rally created more than $ 5,000 billion in stock market wealth, allowing investors to recoup more than half of their losses from a sell-off earlier this year at the start of the pandemic.

Why are stocks climbing when news on the economy has not improved much and the severity of the public health crisis has barely abated? There are two main reasons: First, trillions of dollars in stimulus money from the Fed and Congress come with an implicit guarantee that the government will limit investor risk, regardless of the severity of the crisis. situation. Second, the periodic glow of positive news fuels investor optimism that things can only get better.

Wednesday delivered on both fronts, after officials said an antiviral drug made by Gilead Sciences showed promise in treating Covid-19, the disease caused by the coronavirus. In addition, the Federal Reserve has said it will keep interest rates close to zero and will continue to do everything possible to stabilize the economy.

“What the market is rallying to is the hope that whatever the world is nine or 12 months from now, it will be better than it is today,” said Scott Clemons, chief investment strategist for the private bank at Brown Brothers Harriman.

“On any given day, the market may pick up on specific good information,” Clemons added. “Today is Gilead’s press release and the market has focused on that. But tomorrow is another day.

The direction of the stock market is always determined by a complicated mix of hard data and investor psychology. The price of a stock is based on the amount of money investors believe a company can earn in the future. So investors care less about the real facts reflected in today’s headlines, and more about the kind of picture those facts paint for the year ahead.

For investors, it is quite clear that the US economy is already in a deep recession. More than 20 million jobs were cut in just over a month. Corporate profits are generally expected to collapse.

So when new economic reports emerge, such as the Commerce Department’s announcement on Wednesday that first-quarter gross domestic product fell at an annual rate of 4.8%, they provide little new information to investors.

“The market mainly amortized 2020,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “What they are looking for is for the recovery to begin.”

Over the past month, investors have clung to a slew of indications that worst-case scenarios for the economy may be alleviating.

The federal government acted quickly, passing an estimated $ 2 trillion stimulus bill, the largest economic bailout ever, at the end of March. The markets also received a boost from the Fed, which injected more than $ 2 trillion into financial markets.

“Stimulus was the engine that stabilized and pushed up asset prices,” said Julian Emanuel, chief equity and derivatives strategist at brokerage firm BTIG.

Another piece of good news that investors are taking into account comes from health data. The pace of new infections has slowed sharply as lockdowns continue across the country. Some states, like Tennessee, Georgia, and South Carolina, are starting to open up and others, including New York and California, are setting their criteria for doing so.

Other updates, such as Wednesday’s encouraging statements about the potential of Gilead’s drug remdesivir, reinforced the narrative that things are looking up. Gilead shares rose 5.7% after the company said it was “aware of positive data” from a federal trial of its investigational coronavirus drug. Already, speculative information about the drug’s potential had driven the market up twice in recent weeks.

Later that day, the National Institute of Allergy and Infectious Diseases issued a statement claiming that its study of the drug has shown that it accelerates the recovery of hospital patients with advanced Covid-19.

“Evidence continues to mount that remdesivir has a real therapeutic effect,” said Dr. Brian Abrahams, co-head of biotech equity research at RBC Capital Markets in New York. Dr Abrahams, however, stressed that it was not yet clear how large this benefit would be for patients.

It was clear on Wednesday that investors extrapolated this shred of good news into a better outlook for the economy. The Russell 2000 Small Cap Index climbed nearly 5%. These small stocks tend to be less globally diversified than large companies, which means they are more dependent on the US domestic economy.

Some of the biggest jumps have taken place in parts of the market that have been hit hardest by the virus. Norwegian Cruise Line Holdings has grown by more than 20%. Royal Caribbean and Carnival have also increased by more than 15% each. Energy giants Exxon Mobil and Chevron – hit hard by the 70% collapse in crude prices this year – have both risen more than 5%.

Tech giants also rose after Alphabet, Google’s parent company, reported better-than-expected sales results after markets closed on Tuesday. Since Microsoft, Apple, Amazon, Facebook, and Alphabet are among the top-valued companies in the United States, their weight gives them disproportionate influence in market-capitalization-weighted stock indices such as the S&P 500.

“It really is a question of hope,” said Dan Suzuki, deputy director of investments at Richard Bernstein Advisors, an investment firm. “You get little signs of hope. “

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