This Was A Rally Of Hope

The Dow posted its largest point gain in history on Tuesday of +2,112, beating its previous largest point gain just a week and a half prior, and posting its largest one day gain (+11.37%) since 1933. Markets appeared to be roaring due to a mix of a pending $2 trillion stimulus bill from the U.S. Congress and the President's announcement that he hopes to have the economy be generally back in business by mid-April. The Dow, just the day before close to breaking an 18,000 level not touched in years, was able to finish the day healthily above 20,000 once again.

The market may also have been spurred by the increasingly aggressive and unprecedented Federal Reserve no-cap buying of seemingly nearly every asset class beyond just traditional treasuries and stocks to include municipal debt, corporate bonds, and mortgage-backed securities. It is nonetheless clear that after a month of perhaps the most brutal and volatile selling the United States and world equity markets have ever seen that the market put a lot of money down that today was a good bet for a bottom or at least to average-in heavily.

I believe that there still remain extensive risks to exactly how successful the public health battle will be against coronavirus and thus the extent and duration of its impact not just through government-mandated shutdowns but through disruptions to consumer and business activity even without legal restrictions. Over the past few days, we saw multiple nations outside of Continental Europe and the Americas put a halt to their economy and institute mass-quarantines including India, the United Kingdom, Australia, New Zealand, South Africa, and other nations previously not seen as epicenters.

We Have Barely Seen A Single Bottom-Line Number Post Yet

It is remains unclear to the depth of the damage of even a short period of shutdown. S&P Global cut Delta's credit rating to junk-status today as it joins a parade of other once-titans (as recently as a month ago) in a now credit-danger zone. The corporate credit market remains deeply scarred as risk-hedging and previously safe investments no longer being so have unleashed financial turmoil and rebalancing everywhere from creditor banks to mortgage REITs. We still haven't seen even a trickle of actual numbers post from all the gloom and doom surrounding downgraded company earnings and economic expectations with Goldman Sachs expecting perhaps a Q2 -24% drop in GDP.

I believe at this point many sectors, companies, and the market as a whole look so downtrodden that investors couldn't help but take a bite at a Dow barely holding on to the 18,000's. It is worth noting too that this "buy the broken" trend seems to have happened in many companies and sectors, creating perhaps some worries over whether this rally can truly hold, as the most downbeaten parts of the market from airlines to energy to cruise ships were the biggest gainers of the day.

It's Not The Worst Bet Right Now

As I've previously discussed now is a time for investors to look carefully at which companies are nearing collapse and which ones are merely beaten down or even oversold. There are many healthy companies out there in sectors, such as diversified technology behemoths, not as likely to completely implode or be crippled for years to come or even, for the well-positioned company, gain from the disruptions and shifts in consumer and business behavior coronavirus has brought.

The risks have clearly shifted and a Dow still, even after this 2,000+ point rally, almost 9,000 points off from its high just barely a month ago still can seem quite the bargain. I don't think it is exuberance to believe that the risk-reward for the market or many sectors and companies may be an excellent and appropriate bet at this point.

I believe however that the optimism should be measured however because, as described above, the fight against coronavirus is still only beginning in much of the United States and the world. If that fight goes poorly and infection and death rates soar in now dozens of nations at the same time, even if Italy is able to pass its peak, that could continue to wreak havoc on markets for far longer than a mid-April hopeful timeline for a return to a somewhat-normal.