April 29, 2020

Happy Wednesday morning,

In the absence of any substantive news in the coronavirus or economics arena, the U.S. equity markets started strong yesterday but fizzled out by the end of the trading day.  The Dow dropped 32.23 points (-0.13%), the S&P 500 lost 15.09 points (-0.52%) and the NASDAQ was the biggest loser dropping 122.43 points (-1.40%).  The focus remains, and will remain, progress on medical advancement and economic recovery.

With today comes two significant headlines which are driving the markets higher.  First, Gilead Science’s coronavirus drug, remdesivir, was reported to have shown strong results in recent testing.  It was only about a week ago when initial testing of the drug fell short of manufacturer expectations.  Gilead reported today that results from the drug improve the earlier the drug is taken.

The second major headline today is this morning’s release of the advance read of 1st quarter 2020 GDP, and it came in at -4.8%.  With 2nd quarter GDP expectations running in the -30 to -40% range, we are arguably in a recession – defined as two consecutive quarters with negative GDP.  At 8am PDT today, the Dow is up nearly 500 points.  So why on earth would the market be in rally mode with such a dismal economic outlook?

This indicates to us that the market is expecting the GDP numbers to be bad, so there was no surprise in the 1st quarter estimate of -4.8%.  The market’s focus, it appears, is far more on the speed and power with which the U.S. economy recovers.  The ace in the hole, so to speak, is that the U.S. economy was in pretty good shape when the decline began, and the expectation/hope is that recovery is relatively rapid.  This, in a nutshell, is what is driving today’s stock market rally.

Stay safe and healthy.