• Saahil Menon

When Will The Stock Market Turn Upwards?

Updated: Apr 29, 2020

Source: (FT, 2020)

Amid a global pandemic, an oil price glut, and a series of investor confidence hitting at all-time lows, attempting to pick when exactly the stock market will turn is a troublesome task.

Nevertheless, this market crash can still be perceived as an opportunity to build wealth: especially when the majority of stocks are ripe for investing.

This is why investors should keep track of particular events that would lead to a recovery, as such developments discern two things: a) a good time to open positions and b) an idea of when our current investments can convert from red to green.

Here are the three main events that – we believe – will turn the markets upward.

1. Reopening of economies

Fundamentally, the fact that the global economy is in a virtual standstill is an issue. With companies earning no revenue, sellers seeing no buyers, and individuals receiving no income: the basic drivers of economic growth are stuck. The impact of this can be seen below:

Figure 1: COVID-19 effect in Europe

Source: (FT, 2020)

When business activity plummets as much as it has above, the economic consequences are dire. GDP growth could turn negative, individuals will scramble to save as much as they can, and businesses will cut all costs to keep themselves afloat. Even after COVID-19 passes, these effects will likely continue to take place and it could be years before we see a return to our pre-chaos levels.

If this is the case, how does a reopening of economies result in the market turning upwards?

Great question. Despite the doom-laden outlook on our world, reopening cities will still turn markets upward because there is a disconnection between financial markets and the actual economy: i.e. the market’s performance is ahead of the latter.

Popular finance website – The Balance – explains the reason for this asymmetry below:

Essentially, investors in the financial markets are “forward-looking”, which means they put their money to work today based on growth they see several months or years down the line.
On the other hand, the economy is “backward-looking”, which means that the economy is judged based on previous indicators (i.e. last quarter’s GDP, last weeks job losses etc.).

This means that - for investors - the signal of an economic recovery itself would stimulate confidence, and therefore cause them to begin putting their money back into the markets. This is why the notion of economies reopening - rather than an actual recovery - instills optimism in investors and therefore drives markets upward.

2. Travel

With air travel being one of the most foundational aspects of today’s economy, the sudden halt in flights would’ve largely affected investor confidence.

In fact, the Dow Jones index (a popular proxy for the US market) had one of its largest one-day drops after it was announced that global air-travel would be restricted (March 12th) as much as possible, shown below:

Figure 2: Biggest DJ30 one-day drops

With no flights, the world economy is not only losing over $2 billion in airline revenues per day, but it’s also forcing investors to question just how long this despairing state of economics is going to last. This is why revamped air travel would act as a signal of a return to normalcy, somewhat easing investor fears on the state of global markets.

Key point to consider: Even though an increase in air travel would be beneficial for the world economy (and investors), it may not translate to positive market movement unless people actually decide to take flights.

Figure 3: Survey of consumer sentiment post-COVID

The figure above shows that 40-50% of consumers are unlikely to book holidays next year as a result of prolonged fears concerning COVID-19. This means that the airline industry has to rely on mostly business travel for its income, which will certainly fall short of the $2 billion per day that the industry is used to.

Thus, we may not see a large market upturn unless consumer/commercial air travel returns to levels at least in the vicinity of pre-COVID demand.

3. Medical Progressions

An example of the effects of medical progress was seen last week itself, whereby the S&P500 index (which is a representation of the US market) rose 3% overnight after a Gilead drug had reportedly been able to ease coronavirus symptoms.

Medicinal advances are perhaps the most elastic factor out of the three mentioned today: i.e. any change in its development will cause a more-than-proportional change in the market. As seen above, solely the report of a possibly successful drug caused the market to upturn heavily in a matter of minutes. Likewise, once this drug was proven to be potentially ineffective the next day, the market pared all of its gains almost immediately.

Overall Sentiment...

Based on this, it can be implied that investors will benefit the most by watching medical progressions. Any changes in this factor clearly has a substantial impact on the market: perhaps even more profound than economies reopening and travel combined.

But do we know if any of these developments are coming soon? Not at all. If they come, are we expecting a volatility-free upturn? Not even in fantasyland. Still, given the unpredictability of COVID-19, watching out for such events is the best bet we've got.