Company / Analytics

Analytics, 28 May 2020

Stocks are rising on hopes of economic recovery

States across the world are realizing that eradication of the coronavirus is not possible and that they must find ways to co-exist with the virus. The city and state-wide lockdowns that began in the Chinese city of Wuhan, the initial epicenter of the coronavirus and spread across the world has allowed states enough time to limit the spread as well as to conduct further research on the novel disease.

The resulting social and economic impacts of lockdown restrictions, reduction in the number of cases, and emergence research on drugs and vaccines are encouraging states to start the gradual process of resumption of human activities. Markets across the world are reacting to these developments, with stocks rising on hopes of economic recovery.

It’s been a turbulent period for stocks, with most indices such as the DJI and the S&P 500 alternating between gains to losses, sometimes on the same day, due to fears that the damage from the pandemic will remain for some time.

The rise in travel optimism, for example, was reflected in the stock markets early Tuesday, as the S&P 500 went above 3,000 for the first time since March 5, and the Dow and the Nasdaq indices also showed improvement.

Shares of companies most likely to benefit from the lifting of restrictions on travel and commerce have been faring well. On Tuesday, shares of Delta Air Lines, United Airlines, and other big carriers rose, as did Marriott International.

Delta Air Lines stock rose 13.1% on Tuesday, closing at $25.64, and was 6.0% high in premarket trading on Wednesday. United Airlines was up nearly 12% in early Tuesday trading, rising $3 to $28.38. United closed at 29.53 on Tuesday and is currently (Wednesday) trading at $30.49.

Oil prices have also been climbing all month with expectations that the restarting of factories and resumption of travel will raise demand. On Tuesday, West Texas Intermediate crude rose 3%, with shares of companies in the energy industry like Chevron and Halliburton going higher. At 16:57 GMT on Tuesday, the July WTI crude was trading at $33.86. But these gains have slipped with the WTI falling as much as 3%, to $33.31 per barrel on early trading on Wednesday. The International Energy Agency said in a Wednesday report that the coronavirus pandemic has sparked the largest-ever decline in global energy investment. Brent crude dipped 2.9%, to $35.12 per barrel, at intraday highs.

News of progress on vaccine development — even if the small scale and early stage — has been one factor fueling the gains. Wall Street continues to react to any news from biotech companies with promising research about a Covid-19 drug or vaccine, starting with early May when Gilead Sciences announced an emergency authorization from the US Food and Drug Administration (FDA) for an anti-viral drug. Last week when Moderna announced promising results from human trials of its mRNA-1273, its experimental coronavirus vaccine, there was a positive reaction from Wall Street. But this was shortlived when the Dow lost 391 points a day later on reports that Moderna’s COVID-19 vaccine study lacked key data.

Tuesday’s rally also reflects news from the American biotech firm Novavax which announced on Monday it was starting the first human study of its experimental coronavirus vaccine, with preliminary results expected in July.

But it’s the lifting of lockdown restrictions and resumption of economic activity that is fueling hopes of economic recovery. In the United States, all 50 states have reopened in some way, after two months of lockdown. The stock trading floor of the New York Stock Exchange also reopened on Tuesday, though at a reduced headcount to allow space for social distancing measures to remain in force.

In Europe, markets have been rallying as countries gradually continue to reopen their economies and lift coronavirus lockdown restrictions. All European states have reopened in one way or another, but France and Germany’s gradual reopening are seen as milestones in what is hoped will be the start of the countries’ and the region’s economic recoveries. Businesses are reopening and many children are back in school.

The European Commission also proposed on Wednesday a $826 billion stimulus package intended to aid recovery from the coronavirus-induced recession. If enacted, it would be the largest stimulus package in European history. In Asia, investors appear to disregard tensions between China and the United States and the situation in Hong Kong and are focusing on Japanese leaders gradually lifting emergency measures. Japan’s Prime Minister Shinzo Abe announced Monday that the state of emergency will be lifted in the last five of the country’s 47 prefectures, according to state broadcaster NHK.

While the reopening of economic activity will result in stock gains, any gains are susceptible to a sudden change in sentiment if the reopening plans result in new outbreaks or fresh concerns about the longevity of economic slowdown emerge.

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