Wall Street Asks Questions That Have No Answers

One day after tumbling the most since 1987 by plunging 11.98%, the S&P 500 Index regained its footing and surged by an impressive 6%. The gains came thanks to moves by the Federal Reserve to support the market for short-term corporate debt and more details on the government’s plan to keep the economy from collapsing amid closures intended to mitigate the widening coronavirus pandemic. Both are positives, for sure, but markets won’t truly start to recover until one key question is addressed that no one on Wall Street is qualified to answer.

Rather than how far the economy may drop or whether it’s time to wade back into equities to do some bargain hunting, Deutsche Bank strategist Torsten Slok wrote in a research note that most of his client conversations at the moment center on questions around best practices across countries for limiting the spread of Covid-19. With strategists fielding queries better suited for doctors, it’s clear that items such as the level of interest rates or price-to-earnings ratios are unlikely to matter all that much until more fundamental questions about the coronavirus crisis have some clear answers. “Not even health experts understand what this is or where it is headed, and that is the worst possible outcome for investors,” Jim Paulsen, Leuthold Group Inc.’s chief investment strategist, wrote in a research note. “Give me bad news any day over complete uncertainty.” The point to all this is that the wild swings seen in equities in recent weeks — with Tuesday marking the seventh straight day that the S&P 500 notched a move of at least 4% — will likely continue no matter how much money is thrown into the financial system by central banks and governments. Until a real solution to halting the spread of the coronavirus is developed, such moves will be viewed by markets as little more than triage.