The biggest bounces tend to occur in the worst markets. We had a particularly good illustration of that Monday as the Dow Jones industrial average gained nearly 1,300 points, which is the most in history. That works out to a little over 5%, which is not close to a record, but it was impressive action, nonetheless.
Rallies of this sort produce a massive sigh of relief as the fear that had gripped the market finally relinquishes, but in the bigger context, the Dow and S&P 500 did not even recapture two full days of losses. Both indexes are still under where they were last Wednesday, but it still feels like a victory.
Some folks attributed the bounce to the resurgence of Joe Biden in the Democratic race. Not so long ago the market was rallying as Sen. Bernie Sanders was surging. The argument was that Trump had a better chance to win against Sanders and that was market-friendly. If that is the logic the market is using, then the rally doesn't make as much sense.
The much more likely reason for the strength Monday is that market players are anticipating that the Fed is going to move to cut interest rates at any time. The stage has been set for coordinated action around the world and the European Central Bank may kick off the party with some news on its phone call Tuesday.
Although there are many headlines about companies canceling travel plans and governments preparing for the worst, the coronavirus headlines in the U.S. remain unremarkable. There are a few more deaths and cases in new places, but there is still very limited testing, so there aren't many hard facts. Obviously there is great anticipation that it will get worse, but no real solid evidence of it in the news flow.
As I discussed in my prior post, nothing works better in this market than not fighting the Fed. The acceleration in the indexes in the last hour of trading was most likely a function of that simple dynamic. It may not seem like the action is all that logical, but if the Fed is cutting, there aren't many folks that want to stand in the way.
Have a good evening. I'll see you tomorrow.