Markets don’t have to make sense, but I’m struggling with this.
We have what will potentially be the deepest economic contraction of our lifetime and the S&P 500 just rallied 28% in 13 sessions, leaving the index only 17% off its all-time high.
A few obvious things going on:
- The Fed is taking unprecedented action. Maybe liquidity matters more so than the underlying economic reality.
- Maybe the market already discounted the worst of it and is looking past he recession. It did fall 35% peak-to-trough, which ain’t nothing.
- The S&P 500 is not necessarily the market. The Russell 2000, which is a better proxy for economic reality, fell 44% peak-to-trough, and is still 28% of this highs.
- The market did its job. The stocks that have been hardest hit are the ones that were in the eye of the storm. Hotels fell 40%, energy stocks fell 50%, airlines fell 50%, and cruise stocks fell more than 70%. Many of these stocks will take years to recover, some never will.
The price action we’ve seen over the past few weeks is why the market is such a difficult beast to wrangle, and why having a plan is so critical. Right now market participants are drinking a cocktail of different investor time horizons, risk preferences, fear, greed, and hope. Shake this up and you get some moves that defy logic, both up and down. Please drink responsibly.