COVID-19: Have US Stock Markets Bottomed Out?

• US stock markets rose sharply this week. Now, markets are comfortably above their March lows. Last month, markets fell to multiyear lows due to fears about the COVID-19 pandemic.
• The S&P 500 rose by 12.1% this week—its best performance since 1974. The Dow Jones Index and the Nasdaq Composite rose 12.7% and 10.6%, respectively, during the week. Have markets bottomed out or is this a bear market rally? Let’s see what analysts are saying.

Last month, COVID-19 fears pushed US stock markets to multiyear lows. The Dow Jones Index (NYSEARCA:DIA) and the S&P 500 (NYSEARCA:SPY) made some dubious records amid the crash. On some metrics, the crash paralleled the Great Depression. Notably, the current bear market is the fastest on record. However, the recovery has been equally spectacular. This week, US stock markets built on last week’s gains. The Dow Jones Index and the S&P 500 rose 12.7% and 12.1%, respectively, this week.

Some observers have called it a “bottom” in US stock markets. Morgan Stanley is among the major fund houses that think that stocks have bottomed. Morgan Stanley cited the outperformance of cyclical stocks to substantiate its views. To be sure, cyclical stocks, especially in the metals and mining space, have rebounded sharply. The sector was beaten down as well. J.P. Morgan also thinks that the markets have bottomed.

Not everybody is convinced that US stock markets have bottomed out. According to a CNBC report, David Kostin, Goldman Sachs’ chief equity strategist, is skeptical about the recent rally. He said, “I would just remind you that in 2008 in the fourth quarter there were many different rallies, I call them bear market rallies, some of which almost 20% a couple of times — but the market did not bottom until March of 2009.” BNY Mellon Investment isn’t confident about the rebound in stocks. Citi is also among the brokerages that see more pain ahead for the markets. Paul Tudor Jones expects a double bottom in markets. Read Will the Dow Jones Crash Create a Double Bottom? to learn more.

Meanwhile, fund managers’ opinion has also been divided amid the crash in US stock markets. Bill Ackman of Pershing Square seemed to call it a bottom and aggressively bought stocks last month. He also increased stake in Berkshire Hathaway. Warren Buffett, Berkshire Hathaway’s chairman, initially said that COVID-19 wouldn’t have an impact in the long run. However, Berkshire sold stakes in some airline companies. David Tepper advised caution and selective buying.

Eventually, stock markets are a reflection of the economy. COVID-19 has hit US economic activity. We still don’t know how much time it will take to fully reopen the country. The US government has already announced a $2 trillion stimulus. Notably, more stimulus is expected soon. However, the stimulus adds to the already high fiscal deficit. The economic data over the next month and the upcoming first-quarter earnings will tell us more about COVID-19’s financial impact.

I think that the rally in US stock markets might have gotten ahead of fundamentals. There are still risks like a relapse of COVID-19. Also, watch out for the US-China rivalry once the pandemic settles down. In 2018, an escalation in the US-China trade war spooked investors and global markets plunged. In my view, COVID-19 could add another structural dimension to the US-China rivalry.

Meanwhile, Chinese stock markets have outperformed global markets this year. Read Is the US Stock Market Crash Worse than China’s? to learn more.