News Bad; Market Strong? Pay Attention to the COVID-19 Rate of ChangeSheaff Briefs Editor
It’s a puzzlement—how can the market be this strong when the news continues to be so bad?
A certain calendar date may offer a clue. On March 23, 2020, two things happened. The COVID-19 death “rate of change” peaked, with a steady descent following. At the very same time, the stock market bottomed, then began a sustained rise.
To be sure, the news continues to document a rising pandemic death toll. According to Johns Hopkins, on March 23rd the number of Americans who had died from COVID-19 was 550. Now almost 100,000 are dead. Indeed, on an absolute basis, as shown in the chart below, deaths from COVID-19 continues to rise sharply, particularly as testing becomes more available.
What goes largely unreported in the news, Sheaff Brock Managing Director Dave Gilreath points out, is that, since March 23rd, the COVID rate of change has been trending lower and lower. Published graphs showing the number of deaths reported each day are useful, but “readers are still left trying to discern the extent to which the rise from one day to the next is larger or smaller,” fastcompany.com explains.
“No other infectious-disease outbreak has had more than a tiny effect on U.S. stock-market volatility,” a Kellogg Insight article notes, not even the Spanish Flu of 1918-1920, which killed 2% of the world population. Possible explanations offered by the authors for “the unprecedented Stock-Market reaction to COVID-19” include the richness of information and the interconnectedness of the economy.
The word “unprecedented” might be another signal indicating the need to redirect attention to the “positive” implication of negative numbers, Gilreath explains. The AAII Sentiment Survey reading (published by the American Association of Individual Investors) shows that bullishness is at its lowest level of 2020, more than 1 standard deviation from normal. In the 265 times that bullishness has exceeded 1 SD from average since 1987, the average S&P return over the following 12 month period was 17%.
There is certainly a plethora of information being disseminated, Gilreath agrees, but in one sense, the “richness” is flawed if it includes only COVID-19 death statistics and “unprecedented volatility,” neglecting to consider the influence on the stock market of negative numbers and the COVID-19 rate of change.