The S&P 500 has recovered almost 33% from its late March low, but it may have gone too far too fast.
“Reopenings don’t mean recovery,” says Jeff Kleintop, chief global investment strategist at the Schwab Center for Investment Research. It’s also not clear that the countries with the biggest lockdowns will have the strongest reopenings, according to Kleintop.
He notes that defensive stocks have been leading the rebound in global stock markets, which is very unusual, suggesting that either global stock markets haven’t hit their lows yet or the economic recoveries will be long and slow.
How stock markets behave will depend heavily on how strong economies rebound from lockdowns and whether new cases of COVID-19, which are likely to follow reopenings, will remain contained.
To understand those developments, Kleintop is following alternative data such as data on rush-hour commuting, air pollution, retail foot traffic and electricity usage in addition to the usual economic indicators.
His colleague, Liz Ann Sonders, chief investment strategist at the Schwab Center for Financial Research, says the U.S. stock market is not paying enough attention to “second-order economic effects” of the COVID-19 pandemic.
U.S. stocks, for example, rose slightly the day the government reported that 20.5 million people had lost their jobs in April because it also reported that 80% of those job losses were temporary. But with a growing number of corporate defaults and bankruptcies at small and large companies, those temporary losses may become permanent, says Sonders, adding that such factors “need to be included in market expectations.”