The stock market had a wild week, which ultimately ended with stocks posting their worst weekly decline since 2008. Of course, at fault are escalating concerns that the rapidly spreading coronavirus outbreak is bringing the global economy to a screeching halt.
These concerns aren’t going away anytime soon. If anything, they will only escalate as Covid-19 spreads more in the U.S. and across Europe.
Does that mean it’s time to sell everything? Or has the stock market already priced in all this bad news? Are stock ready to bounce?
Good questions. Tough answers. But, let’s try to answer those tough questions in this weekend’s Stock Market Weekend Recap.
What Happened in Markets Last Week?
Financial markets last week were hit with a combination of good and bad news. By the end of the week, the bad significantly outweighed the good.
On the good news front, investors got a few reminders that the U.S. economy was on pretty solid footing heading into the coronavirus pandemic. Retail sales for February came in strong on Tuesday. So did Redbook sales for the first two weeks of March. There was some strong housing data this week, too, including a decade-best existing home sales number for February.
But, investors didn’t care about any of that. Nor did they care that the Fed cut rates to zero last Sunday, or that the U.S. government is considering putting together a $1 trillion stimulus package to help aid an American economy that has essentially shut down.
Instead, all investors cared about — and rightly so — was that reported coronavirus cases in the United States and throughout Europe continued to spike. From Sunday through Friday, confirmed coronavirus jumped by 90% in Italy, 130% in France, 170% in Spain, 240% in Germany and 430% in the U.S. These big jumps — indicative of the fact that the virus is not slowing in any of these countries — prompted governments to further constrict daily life, with now hundreds of millions of consumers across the globe ordered to “stay home.”
The implication is that so long as this virus keeps spreading, the economy will keep tumbling. Investors are selling, partly because they know second-quarter earnings will be disastrous, and also in part because they don’t see a light at the end of this tunnel.
Net net, the Dow Jones Industrial Average dropped 17.3% during the week, marking its worst weekly performance since 2008.
What Should You be Watching in Markets This Week?
This week could be equally brutal for the stock market … or it could be much better.
It increasingly appears that all markets care about is the coronavirus pandemic. Regardless of everything else, it all comes back to the number of new coronavirus cases in the U.S. and across Europe. If those numbers keep going up, stocks will keep going down. If they start going down, stocks will start going up.
There’s some reason to believe that the numbers in Europe will start to go down this week.
The incubation period for the coronavirus is estimated to be 14 days. Italy went into quarantine on March 9. If social distancing is working in that country, then theoretically speaking, we should start to see spread slowdown in Italy sometime this week.
If we do — and if the U.S. government can pass what is now rumored to be a $2 trillion-plus stimulus package to help assist American workers and companies during this crisis — then stocks will bounce.
But, if those numbers don’t peak, and if the weekly jobless claims number on Thursday blows what are already sky-high estimates out of the water, then the stock market could be in for another painful week.
Bottom Line on the Stock Market
Believe it or not, we are already in a recession. Consumers drive about 70% of the U.S. economy. You can’t keep all those consumers locked up at home and expect the economy not to fall into a recession. The economic data over the next week — and next month — will confirm as much.
But, that’s not all that important. The stock market — already down 35% from its recent peak and trading at just 13-times forward earnings — is priced for us to enter some sort of a recession.
Instead, what matters is what type of recession we are in. Is this recession going to be short, last one to two quarters, and then lead into a huge second-half rebound? Or is it going to drag on for several quarters, and potentially lead into a depression?
The answer lies in the number of new coronavirus cases reported each day. If those numbers keep going up, a prolonged recession and potential depression look likely. Stocks will keep falling. If those numbers start plateauing, however, a short recession and a quick recovery look likely. Stocks will rebound.
So, in the week ahead, pay attention to those coronavirus numbers. If they start flattening out, take that as “all clear” symbol for stocks to start moving higher.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.