North American stocks extended a major rally Wednesday, after the U.S. Congress struck a deal for a US$2-trillion emergency spending package to help shore up an economy reeling from the coronavirus pandemic.
The Dow Jones Industrial Average ended the day up 2.4 per cent, while the S&P/TSX Composite Index was up 4.5 per cent. They were the first gains on back-to-back days in seven weeks for the U.S. index, and five for the TSX.
Combined with a monumental rebound on Tuesday, the TSX has climbed a blistering 17 per cent in just two trading days, and the Dow is up 14 per cent, fuelling optimism that a lasting recovery in financial markets is under way. But both indexes remain more than 25-per-cent below their prepanic highs in February.
The bond market also appeared to reflect easing concerns about financial conditions and fears of widespread bankruptcies on Wednesday, as corporate bond funds in Canada and the U.S. rose for the second straight day.
“The coronavirus spread is intensifying in the U.S., but some optimism is growing that it could peak in a few weeks and right now traders are primarily focused on all this stimulus,” Edward Moya, a market analyst at Oanda, said in a note.
Of course, bear markets often generate false starts, and then succumb to renewed volatility and decline further.
“It’s a reflexive bounce off of really oversold levels,” said Jason Mann, chief investment officer at Toronto-based Edgehill Partners. “Look through history – every one of the largest up days is smack in the middle of a bear market.”
On Tuesday, the Dow had its biggest single-day percentage gain since 1933, while the 12-per-cent rise in the S&P/TSX Composite had no precedent dating back to the establishment of the benchmark’s predecessor index in 1977.
As the bear market has unfolded in hyperspeed over the past few weeks, days of sheer panic selling and staggering losses have often been followed by sharp gains of equally dramatic proportions.
This dizzying give-and-take is occurring as markets struggle to reconcile two great opposing forces – the grave economic and public-health risk posed by a once-in-a-century pandemic on one hand, and the financial firepower being unleashed by governments and central banks to try to avert economic devastation on the other.
As COVID-19 spreads through Europe and North America, shuttered businesses and stay-at-home orders are spawning a recession that economists and investors are struggling to fathom.
“Brace yourself for some horrible data in the near-term, as there’s little doubt that the second quarter will produce some painful and likely historic figures on job losses and economic contraction,” Brian DePratto, senior economist at Toronto-Dominion Bank, said in a report published on Wednesday
In the second quarter, Canada’s real GDP is expected to decline by 24.8 per cent on an annualized basis, while unemployment is projected to rise to an average of 11.7 per cent, Mr. DePratto said.
For at least a couple of days, however, markets have looked past the growing economic carnage.
The U.S. stimulus bill – the largest in history – represents “a wartime level of investment for our nation,” Senate Majority Leader Mitch McConnell said on Wednesday. The package includes hundreds of billions in direct payments to households and loans to distressed companies.
The U.S. Federal Reserve, meanwhile, has pledged “unlimited” stimulus that will likely see the central bank purchase trillions of dollars worth of government and corporate bonds.
Chris Currie, a portfolio manager at Toronto-based Goodwood Funds, said that there was a freeze in some sectors of the government bond market before the Fed magnified its bond-buying program.
“The fact that investors view the Fed as willing to ‘do whatever it takes,’ to borrow a phrase, has helped confidence,” Mr. Currie said in an e-mail to The Globe and Mail.
The iShares iBoxx $ Investment Grade Corporate Bond ETF, an exchange-traded fund that tracks U.S. investment-grade corporate bonds, has climbed by 14.8 per cent since the end of last week.
The rebounds in bonds and stocks seem to have a believer in Bill Ackman, the billionaire investor and founder of Pershing Square Capital Management, a U.S. hedge fund company, who had warned just a week ago that “hell is coming.”
“We became increasingly positive on equity and credit markets last week, and began the process of unwinding our hedges and redeploying our capital in companies we love at bargain prices,” Mr. Ackman said in a letter to investors on Wednesday, according to a report in the Financial Times.
But investors would be wise to approach this fragile rebound with caution, said Edgehill’s Mr. Mann. “We have to assume we are in a recession, and it would be unusual for a recessionary bear market to end with a sharp V-shaped recovery.”
Tim Shufelt
David Berman