“The rally in the stock market from the March 23 lows was simply overdone,” said David Kelly, chief global market strategist at JPMorgan Funds. “We are still in a very deep recession. We still have a tremendous amount of uncertainty about the virus but also about stimulus and politics.”
“The market is pricing in a V-shaped recovery. But what you really have is a huge slump, a bump and then a crawl until we get a vaccine,” said Kelly.
‘Mass unemployment’ isn’t going away anytime soon
Prior to this crisis, the biggest weekly jobless claims figure was 665,000 during the Great Recession. In other words, claims are still rising at more than twice the prior record pace.
“Mass unemployment is going to be the primary condition that defines the economic narrative going forward,” Joe Brusuelas, chief economist at RSM International, wrote in a report Thursday.
Hospitalizations are up in 12 states
Meanwhile, the coronavirus numbers have deteriorated in recent days, raising fears of a return of the health restrictions that caused mass layoffs in the first place. A second wave would slow the economy, hurt corporate profits and dent consumer and business confidence.
Morgan Stanley biotech analyst Matthew Harrison called the trends “manageable” but noted they’re a “concerning signal for the fall” when hospital space will be more limited and people are stuck indoors.
Harrison rejected the argument that the recent uptick in cases is being driven mainly by increased testing.
“We conclude active community spread is likely still ongoing,” Harrison wrote in a Thursday report to clients.
“The market is not prepared for a material second wave that would result in additional lockdowns,” said Jeff Kleintop, chief global investment strategist at Charles Schwab.
Despite the worsening coronavirus trends, Treasury Secretary Steven Mnuchin said the federal government won’t put the entire nation back into lockdown to fight the pandemic.
“We can’t shut down the economy again,” Mnuchin told CNBC on Thursday. “We’ve learned that if you shut down the economy, you’re going to create more damage, not just economic damage. Medical problems and everything else that gets put on hold.”
Still, parts of the country could need to bring back some health restrictions if outbreaks emerge.
Airlines, cruise lines get crushed
Optimism about pandemic trends led investors to bet in recent weeks on the parts of the stock market most exposed, including airlines, cruises and hotels. That trend is now reversing.
“The idea the hotel, travel industry or energy demand will come back fast — those are pipe dreams,” JPMorgan’s Kelly said.
Amid the market turmoil, President Donald Trump expressed confidence about the economic and health outlook.
Kelly cautioned that there is no guarantee a vaccine will be effective, nor that most of the population agrees to take it.
“We could be haunted by this thing for some time to come,” he said.
The heavy selling on Wall Street Thursday will bring back bad memories of the turmoil in February and March that rocked markets.
But Schwab’s Kleintop doesn’t think US stocks will necessarily retest their March 23 lows.
“We may only need to unwind a few weeks of the rally,” Kleintop said.
Still, given the rapid rise in the stock market over that that span, it could be a painful unwind.