S&P Briefly Enters Bull Market Territory Before Paring Back Gains

Chris Gaetano
Published Date:
Apr 7, 2020

Riding a major rally predicated on hope the virus may be peaking, the S&P 500 index briefly entered a bull market before paring down to lower, but still high, levels, according to Bloomberg. While there is no official definition for such conditions, the Motley Fool said that, generally, a bull market begins when we see a 20 percent rise in stock prices after a 20 percent decline, and ends when stocks suffer a further 20 percent decline after that. The S&P 500 reached that point this morning after a 3.5 percent gain, but it fell back to a 2 percent gain as of midday. The Dow gained 1.4 percent as of midday, bringing it to its highest levels in three weeks, while the Nasdaq reached a four-week high with a 7.3 percent gain. Despite these gains, said Bloomberg, market watchers are advising against thinking this will be a sustained rally, given the major economic disruptions that are are still continuing to happen in the face of the global pandemic.

A poll of institutional investors by Goldman Sachs revealed similar thoughts: About 50 percent said the stock market has yet to reach bottom, and 75 percent of them think that, despite recent gains, we're still in a bear market. Further, 45 percent don't view the market figures as particularly consequential because it appears they have yet to fully price in the major blow to the labor market that was recently announced. An analyst from Citibank said that the current market gains are more comparable to an aftershock, as there hasn't really been the volume to justify them. CNBC's Jim Cramer also noted that regular people don't share Wall Street's optimism, pointing to a rise in Darden stock, the company that owns Olive Garden; that seems to make little sense given how few people are actually going out to eat. Traders, he said, aren't really thinking about how the pandemic might change our social habits and make restaurants in general less attractive in the long run.

Outside stocks, the credit market remains in a state of flux since the Federal Reserve's recent emergency actions. On the one hand, the central bank did manage to stabilize credit among established companies with high credit ratings, which has helped control borrowing costs in this area. On the other, credit rating agencies like Moody's and Fitch have been issuing credit downgrades, one after another after another, for weeks now, and overall they are warning that the long-term outlook for world credit markets remain bleak. A recent report from Moody's said that speculative-grade companies with weak liquidity and refinancing profiles are dominating the recent wave of downgrades, which in turn reflects its predictions that bond defaults are likely to increase significantly. 

One on-the-ground effect of the bond market turmoil can be found in Sweden, where Bloomberg is reporting that investors rushed to withdraw their stakes from 35 different bond funds only to find that, due to gating rules, they couldn't. Corporate bond funds there had been marketed as alternatives to savings accounts. However, these same funds were filled with debt from risky companies, the true extent of which many Swedes thought was not properly communicated to them. The result was that as these companies began to sink, the value of the bond funds did too, and so people rushed to withdraw their money, since they had likened their investments to savings accounts, but found that the funds were not letting them do so. While this is legal, many Swedes were unaware of that, and so they found themselves flatfooted, effectively locked out of the money they thought they could access like a savings account.

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