Zillow Market Pulse: April 10, 2020

April 10, 2020

Despite an unending stream of bad economic and public health news, the U.S. stock market had its best week in almost half a century. Markets were buoyed by growing investor optimism and historic assistance from the Federal Reserve.

• U.S. stock indices experienced their best week in 46 years

  • The S&P 500 jumped about 12% this week, and is now up roughly 20% from recent lows hit in mid-March.
  • The 12% weekly gain represents about $4 trillion poured back into markets.

• Most of the gains came on the heels of aggressive actions by the Federal Reserve

  • The Fed's historic intervention into bond markets lowered key measures of volatility.
  • The CBOE Volatility Index (VIX) – a measure of stock market volatility – remains very high relative to historic norms, but is down about 50% from recent highs.

• Cumulative stock market declines have — so far — been much less than those during prior downturns

  • From its most-recent peak to its most-recent low, the S&P 500 fell 34%.
  • The index fell 57% in the Global Financial Crisis, and 49% in the dot-com bust.

So what?

Market watchers should be forgiven if they feel a sense of whiplash. A few weeks after $10 trillion was erased from stock prices, about $4 trillion was added back this week. The S&P 500 is now up 20% from lows reached in mid-March, technically putting the market into bull territory — just a few weeks after it transitioned into a bear market at the fastest pace ever recorded. It's difficult to point towards a specific cause for the recent change in direction, but most of these movements can likely be chalked up to a few select developments. There are faint signals that the spread of COVID-19 is showing some signs of slowing, developments in oil markets have provided some semblance of stability and historic interventions by central banks worldwide have helped keep markets from completely collapsing. There have been a few false dawns since the market decline began, including the biggest one-day market increase since 1933 on March 24, but to date they've all given way to continued deep declines. Still, this week's surge feels a little different, driven by seemingly genuine investor optimism even as the drumbeat of bad news continues — including a sharp increase in COVID-19 deaths, another enormous jump in unemployment claims and stalled talks on further federal stimulus.  

The Federal Reserve has taken swift, unprecedented actions in recent weeks in an effort to prevent strains in financial markets from trickling back into the real economy. Among these measures has been a direct intervention into the market for corporate debt, which has ballooned in recent years to its highest-ever level. Corporate bond markets were flashing red lights in recent weeks as liquidity shortages and concerns about companies' credit-worthiness put a freeze on the market. The Fed's initial foray into the corporate debt space, announced a couple weeks ago, helped quell some of this anxiety, but debt downgrades to junk status continued to mount. So the Fed stepped in with even more force, and the resulting and somewhat surprising reduction of perceived credit risk led to a remarkable gain in corporate bonds and stocks on Thursday, just in time for an extended three-day Easter weekend (markets were closed today).

Still, despite this optimism and seemingly-limitless support from central banks, it remains very unclear where markets go from here. To many, this nascent "recovery" doesn't make a lot of sense. An unemployment rate that is almost certainly in the double-digits, broadly anticipated widespread bankruptcies and large portions of the economy remaining at a standstill don’t exactly add up to the kind of strong market fundamentals that would provide the foundation for a strong market surge. To be sure, this recent market "strength" doesn't come close to fully reversing the exceptionally swift and steep market pullback that began in late February and included the fastest transition from bull to bear market in history. But the selloff has so far been small relative to recent recessions, even as the potential economic threat posed by COVID-19 remains very high (to say nothing of the threat to public health). From its most recent peak to its most recent low, the S&P 500 fell 34%, far lower than pullback in the index during the Global Financial Crisis (57%) and the dot-com bust of the late 1990s and early 2000s (49%). Given the forecasts for extreme reductions in economic output both at home and abroad, one would think that the market has more room to fall. But some believe that investors have accepted that more losses are on the way, and may be choosing to look past 2020 altogether and take the opportunity to make investments at bargain prices in companies that inspire longer-term confidence. Whatever the direction from here, this week will go down as another historic one, amid a truly unprecedented stretch for markets.

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