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US markets up 11% - can we trust this rally?

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Stocks have rebounded strongly on the hopes that a huge US stimulus package is close but can you trust this rally? My history of watching stock markets under stress makes me ask: “Is this a sucker’s rally?”

That said, I do think we are getting closer to a more believable bounce back of the stock market, but I’m yet to be convinced that the key parts of the world that drive the global economy and in turn the stock markets of the planet have been given the ultimate sign that “it’s share buying time!”

The Dow Jones Industrial Average finished up 11.37% (or up 2,113 points) with three of the four legs of the “stool” that stock markets will sit on to consume more palatable servings from the stock market.

One leg is the supportive work of central banks, which are helping money market liquidity during this Coronavirus crisis. Next is the supply of stimulus packages and it’s why Wall Street has lapped up the US getting close to its overdue stimulus package, tipped to be around US$2 trillion, when a week ago it was expected to be only US$1 trillion!

The next leg sees much stronger banks than in the GFC helping stimulus measures from governments. In our own case, the likes of CBA has talked about giving virus affected business owners with a home loan a six-months period of repayment deferment! And other banks are shocking me with their offers that will help businesses and household borrowers over the next six months or so.

The final leg remains shaky and needs to be firmly screwed up tight before you can totally trust this comeback for stocks. Yesterday I reported that Italy had two days of falling infections but overnight that good news was spoiled by the death toll rising by 602 in one day!

The day the world is convinced that the worst of this damn virus is behind us — infection and death-wise — the stock market will surge out of the bear market. Until then, there is bound to be rallies and sell offs with forward-thinking, longer-term investors and fund managers buying great companies at cheap prices.

However, I will be surprised if the stock market can look at the infection/death challenges right now and going forward and say “yep, the worst is over and so it’s buying time.”

The big gamble going forward is when will the virus stop closing down businesses, cafes, pubs and economies?

Overnight, Boris Johnson thought the Poms will have it nailed in 12 weeks. Donald Trump is speculating about Easter, recently saying he thought the US could open up again “fairly soon.”

You have to hope he’s right.

Bond fund manager, Chris Joye, has his research team watching the worldwide infection rates looking for the peak in the Coronavirus’s impact on humanity. He thinks policies such as lockdowns, social distancing and the prospects of some treatments using existing drugs (that the US President is publicly backing) could prove to be a surprise circuit-breaker in the spread of the virus.

Apart from his interest in sharing his insights with a country hoping for good virus containment news (for both health and wealth reasons), any sign that the worst is behind us will be a signal for him to change his investment strategies.

In an interview, for my Switzer Show podcast, Joye says he suspects within 3-4 weeks there could be sufficient good news on the containment of the Coronavirus to give financial markets the belief that it’s less of a gamble to be buying stocks.

CNBC has surveyed economists at the likes of Goldman Sachs, which says the US economy contracts by 24% in the second quarter of 2020 and the range of economic decline goes from 24% to a median around 12%, but one strange economist thinks only 5%!

That said, most economists expect a big bounce back of 6.2% for US economic growth in the third quarter. And remember that stock markets get ahead of the curve so buying on the third quarter improvement for company earnings will happen well before that better economic reality actually shows up.

Believe it or not there are signs that the worst of the stock market crash could be behind us and I will look at these tomorrow. But it has to be remembered that the Coronavirus is a unique challenge to stocks and history and chart-lines of what markets have done in the past might be completely trumped by an escalation of infections and deaths in the USA.

Overnight, the World Health Organization said the US could become the epicentre of the virus as President Trump refuses to lockdown the country.

Locally, we have bumped up our restrictions on business and the economy and today those negatives will fight the positives out of Wall Street overnight.

The battle will be interesting and even if we go positive today for stocks, I think there are going to be some virus-created bad days ahead.

That said, the magnitude of the overnight rise shows those who are panicking that stocks won’t recover are allowing their short-term fears to swamp their better and more sensible, long-term investor attitude to stocks.

Peter Switzer is the founder of the Switzer Group. All prices and analysis at 25 March 2020. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.