Happy Memorial Day weekend!
Today I am going to share a quick update on the stock market and what I expect to happen next.
After plunging in March because of covid, global stocks have seen a big rebound in the last eight weeks.
The S&P 500 (SPY) has rebounded 32% from the recent low in mid March.
The leading index is now down 9% on the year.
The Vanguard Global Stock Market (VT) has rebounded 29% from the recent low and is now down 14% on the year.
Take a look below.
Why Did the Market Rebound?
Here’s the biggest reason stocks have rebounded so much.
When the stock market absorbs bad news it frequently prices in the worst case scenario. In the case of covid, the stock market almost immediately priced in a worst case scenario. Total shutdown of the global economy for the rest of the year, hundreds of millions infected and millions dead. That’s why stocks fell 35% in four weeks – one of the fastest and largest drops in the history of the stock market.
However, as usual, the worst case scenario didn’t happen – and that has been driving big capital inflows back into stocks.
What Should We Expect Moving Forward?
Looking forward I remain optimistic on the global economy and global stocks.
The US is re opening: More states continue to re open and that should continue to be good for the economy, jobs and the stock market.
Stocks are still oversold: The relative strength index is a technical indicator that measures when a stock is either oversold or overbought. The objective is to buy a stock when its oversold and sell when its overbought. After the sharp sell off in March the S&P 500 was the most oversold its been in five years and the index is still far from being overbought. Take a look below.
How Should We Play It?
In the short run, after this big rebound, stocks look a little extended.
I wouldn’t be surprised to see a small pullback – but I don’t expect more than 5%.
Beyond short-term volatility I’m optimistic on stocks. I am expecting US stocks to continue rising and I think there’s a good chance the S&P 500 closes with a gain in 2020.
I’ll be back later this week with another update.
I hope everyone has a really great Memorial Day Weekend!