What Could Stop the Stock Market Rally?
May 11, 2020
The coronavirus upended the stock market in ways no one could have predicted, leading to massive losses earlier in the year. As severe as the losses were, the rebound has been impressive, with the S&P 500 climbing 25% from recent lows. The rally has confounded some analysts, who feel the stock market’s stellar performance is at odds with the grim state of the economy, but the rally shows that investors are confident that the worst has passed. It remains to be seen if they are correct, but here a few issues on the horizon that could serve as headwinds to the rally.
The first, and likely most dire, would be a second wave of infections. States across the nation, and nations across the globe, are handling the outbreak differently, with some doing better than others. The interconnected nature of the world today, however, means that even areas doing well are at risk of transmission as regular travel resumes. Health officials are concerned that economies may be reopening too soon, and we could see a spike in new cases. Most worryingly is the possibility that the virus mutates, and we are confronted with a more contagious or more dangerous strain in the fall. Any of this could cause governments to implement another round of lockdowns, damaging economies that were just starting to recover.
Another concern is a wave of bankruptcies. Companies from a wide swath of the economy, from hotels and airlines to retailers and oil companies, are facing record losses and major debt concerns. A wave of defaults could result in even more job losses, and even just credit downgrades could roil the bond market.
Finally, the global nature of the coronavirus crisis has more governments and companies rethinking global trade. Trade tensions between the U.S. and China had cooled at the start of the year, but now it looks like they could heat back up. China, and its perceived failures in handling and containing the virus, will be a key issue in the upcoming election, with both sides angling to be tough on the nation and hold the Chinese accountable.