An Analysis of the Stock Market Rebound and its Future Projections
Since the historic lows in March 2020, the stock market has exhibited a remarkable recovery. This article delves into the reasons behind the market's rebound and discusses the potential bearish outlook for the future, particularly as the earnings season and economic recovery progress.
Why Has the Stock Market Bounced Back So Much?
The post-March 2020 recovery in the stock market certainly caught many, including short sellers, off-guard. The market's resilience is often attributed to the large influx of capital from major institutions aimed at stabilizing it. Despite the initial bearish sentiment, the market's ability to recover is a testament to how securities markets tend to function, often recovering even in the face of substantial adverse events.
The Rational Case Against Further Declines
Since 1962, no bear market that experienced a 50% retracement has ever retested its lows. For example, since the March 2020 lows, the Dow Jones Industrial Average hit 19,800 but has since risen to much higher levels. This historical pattern does not support the expectation of the stock market returning to its March 2020 lows anytime soon. Therefore, advice to wait for lower prices is usually advising patience with higher, not lower, prices.
The Bear Case for a Possible Return to Lows
The probability of a return to the March 2020 lows remains low, but there are several factors that could potentially lead to a future downturn. For instance, the earnings season and industry closures in the Oil Patch, Retail, and Services sectors could provide disheartening data, particularly as more businesses fail to meet expectations. In a worst-case scenario, if businesses do not secure new credit, sell off assets, or reduce expenses, thousands of companies may face insolvency by the summer.
The Economic Impact and Future Outlook
Should thousands of businesses become insolvent, it could create a domino effect, potentially leading to further economic collapse. The normal functioning of capitalism would still see weaker businesses fail, and survivors become stronger, but this assumes a certain level of stability and economic activity. Currently, the post-COVID economy faces unprecedented challenges, making future conditions non-normal.
Conclusion
While the stock market has bounced back significantly since March 2020, there are reasons to monitor the earnings season and economic recovery closely. The upcoming challenges in the Oil Patch, Retail, and Services sectors could cause a decline, but historically, such declines do not retest the lows of the previous bear market.
For investors, it's important to remain informed and prepared for both recovery and the potential for further adjustments. The current resilience of the market should not be taken for granted, and it's wise to be cautious while remaining patient.