Coronavirus slowing but stocks still face 'extreme reckoning'

It would be an 'extreme outlier' if the S&P didn't hit new lows

The benchmark S&P 500 is on the verge of officially ending its technical bear market, but some on Wall Street are worried that it hasn't hit bottom yet.

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The S&P 500 surged 19 percent from its March 23 low through Tuesday, coming close to ending what would be the second-shortest bear market in history, beaten only by one in 1929, according to Dow Jones Market Data. To make it official, the index needs to close above 2,684.88, about 1 percent from where it finished on Tuesday.

“Looking at markets since 1929, it would be unprecedented if the S&P failed to re-test or even fall below its March 23 low, given the size of the recent drawdown (-34%) and assuming a recession ensues,” wrote Nitin Saksena, an analyst at Bank of America. He says the S&P 500 may rally as high as 3,000, or 13 percent above Tuesday’s closing level, and still tumble back below March lows.

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Before rallying, the S&P 500 had fallen by as much as 34 percent since topping out on Feb.19 as the COVID-19 pandemic prompted predictions the U.S economy will experience its sharpest economic contraction of the post-World War II era. The virus has infected 1.45 million people worldwide and killed more than 83,000, according to the latest data provided by Johns Hopkins University & Medicine. Over 308,000 people have recovered.

While investors have become more optimistic this week as the number of hospitalizations due to COVID-19 appears to be plateauing in some of the hardest-hit areas of the U.S., it appears the rally isn’t built to last.

Masanari Takada, macro and quant strategist at the Tokyo-based financial holding company Nomura, says the upswing is best viewed as an “unenthusiastic, inorganic bear market rally” as traders are forced to exit bearish bets and are seeing their short positions squeezed. He believes the stock-market rally “faces a reckoning” by April 22.

Saksena agrees that the S&P 500 will see more pain ahead, noting that the market has not yet traded like a recession bear market.

“Assuming a recession firmly built into consensus, this year's drawdown would be an extreme outlier if the S&P ends up not falling to new lows,” he wrote.

Not everyone thinks the market needs to revisit its March 23 bottom, however.

Mike Wilson, chief U.S. equity strategist at Morgan Stanley, said in a note to clients over the weekend that he thinks the current environment is like 1929 and doesn’t believe there will be a “full retest of the lows.”

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He added that Morgan Stanley thinks ‘this is the end of a cyclical bear market that began two years ago in the context of a secular bull market that began in 2011.”