Stock Market Outlook. Bulls Back in The Fame

Author: Alexey Gulyi – Chief Analyst at EverFx

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US stock market regained some positions lost in the severe market sell-off caused by the pandemic of coronavirus. Risk appetite was boosted by unprecedented monetary and fiscal stimulus adopted by developed countries. Leaders of G20 pledged to inject over 5 trillion dollars into global economy and do whatever it takes to overcome pandemic.

US stock market regained some positions lost in the severe market sell-off caused by the pandemic of coronavirus. Risk appetite was boosted by unprecedented monetary and fiscal stimulus adopted by developed countries. Leaders of G20 pledged to inject over 5 trillion dollars into global economy and do whatever it takes to overcome pandemic. 

Meanwhile, the pace of pandemic has been accelerating in the USA and Europe. Global confirmed cases of coronavirus exceeded 1 million (USA account for nearly quarter of this number) and the number of deaths exceeded 54 thousand.  President Trump, who used to downplay the coronavirus threat, changed his position, as New York became the new epicenter of pandemic and death toll increased significantly in the USA.

Public and private institutions released gloomy outlook for US economy in the second quarter, though these forecasts vary significantly. Institutions expect economic recovery in the second half of the year and in 2021. Goldman Sachs forecasts US GDP decline of 34% in the second quarter, while Morgan Stanley expects GDP contraction of 38% in the same period. According to projections released by US Congressional Budget Office, GDP will decline by 7% in the second quarter.

Despite the accelerating spread of coronavirus and gloomy economic outlook, US stock market indices managed to restore a significant part of their losses. Dow Jones even crossed a 20% growth mark, which is an indication of the bullish market. Stock market got a boost from the Fed, which unveiled an unprecedented quantitative easing program on March 23. On this day, indices reached a bottom (at least for now). The Federal Reserve announced unlimited quantitative easing program, stating that purchases of Treasury bonds and mortgage-backed securities will be carried out “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy”. The Fed also expanded its quantitative easing program to include municipal and corporate bonds. Later, Fed also established repo facility for foreign central banks in order to meet demand for dollars abroad without the need to sell Treasury securities. An unprecedented asset-purchase program, which is estimated to be around 4 trillion dollars, boosted stock markets and put downward pressure on the dollar.

Stock market got further support from lawmakers, which unveiled unprecedented fiscal stimulus. US Congress passed the bill on economic measures aimed at smoothing the effects of the epidemic. This bill provides state support in the amount of 2.2 trillion dollars, which exceeds the package of measures taken in the midst of the 2008-2009 recession. In particular, it provides direct financial aid to US citizens whose income is less than $100 thousand per year, loans to the industries most hit by the epidemic and small businesses, healthcare financing, financial assistance to local authorities and increasing unemployment insurance. Keep up to date with the latest news from the weekly review of EverFX.

Monetary and fiscal stimulus spurred 20% recovery of stock market indices. S&P 500 reached 2640 level, from which bulls retreated. What is notable in the past two weeks is the divergence between the pace of the epidemic outbreak and performance of the stock market. The divergence lies in the fact that previously significant increase in the number of new cases of coronavirus led to the market sell-off and stock market indices fell to new lows. Since March 23, stock market indices not only do not reach new lows, but also continue to grow despite a significant increase in the number of confirmed cases. Bulls retreated only when they stumbled on technical resistance 2640. Bears regained some positions as Trump warned Americans of a painful two weeks ahead in fighting coronavirus and White House coronavirus coordinator Dr. Deborah Birx showed charts, which modelled jump in the number of deaths from coronavirus to 100 – 240 thousand.

Bulls managed to hold positions at 2460 support level despite disappointing data on jobless claims, which increased by nearly 10 million in two weeks. Stock market got boost from rising oil price, which helped oil producers to restore some positions. Oil price hit 18-year minimum due to price war unleashed by Saudi Arabia after Russia refused to cut production. On Thursday, Donald Trump said that he had talks with leaders of Russia and Saudi Arabia and he came to conclusion that these countries will agree on production cuts of 10 – 15 million barrels per day in coming days. Oil price surged by over 20% in one day. Mass media reported that OPEC+ summit may be convened next week.

So, bulls managed to hold positions despite negative macroeconomic outlook and accelerating spread of coronavirus. Stock market indices might have reached the bottom on March 23, though this hypothesis lacks technical confirmation. In order to get bullish technical picture on S&P 500, index should reach 2790 level. But before that bulls need to cross 2640 mark, from which price bounced four times. Alternatively, if 2460 is broken (there were two false breakouts), the way to 2407 will be open and if this support is broken, market bottom hypothesis will be questioned. 

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