What’s The Catalyst?

The stock market is wrapping up its best month in over 30 years. What was the catalyst?

In the five weeks from February 20th through March 19th, there were 1.1 million jobless claims, and the stock market fell 29%. In the five weeks since there were 26.5 million jobless claims and the market rallied 28%.

What’s amazing about this is not just that the market rallied, it’s how it rallied. On the day we received the first big jobless claim number, the S&P 500 gained 6%! On the following week’s release it gained 2.3%, and a week later it gained 1.4%.

Yesterday we got the worst GDP number since the Great Financial Crisis. The S&P 500 gained 2.7%.

We look at the headlines and we look at the screen and we scratch our heads in disbelief. “This doesn’t make any sense,” we say.

We know that stocks are forward looking, but it’s in our nature to connect the news of the day with the price on the screen. This is the investor’s cognitive asset liability mismatch. We’re looking at today, the market is looking into the future. That doesn’t mean it always gets it right, but that’s why it feels like it always gets it wrong.

Stocks aren’t rallying because of terrible numbers. They fell in anticipation of them. For the last few weeks they’ve been rising in anticipation of the recovery.

In the eye of the storm, when all the news is terrible, it’s common for investors to wonder what the catalyst will be for the selling to end. This is the wrong question to ask. The market doesn’t need a catalyst, it’s not a biotech stock. Sometimes the reason the market stops falling is because nobody ever sees it ending. Like Harvey Dent said, “The night is darkest just before the dawn.”

Nobody wants to read a headline “Stocks rise as things are terrible but not catastrophic,” but this is usually closer to the truth than any other explanation. This is hardly a satisfying story, but the market is not there to satisfy us, it’s there to confuse us.

We know that the market is forward looking, but come on, you gotta admit, this was one of the most confusing months on record.


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