Markets managed to recover some losses Monday, as the S&P 500 closed up 0.8% on Monday (after trading down as much as 2.5%), while the Dow closed 0.6% higher. Stocks rebounded once the Fed announced it will begin buying individual corporate bonds as an update to continuing efforts to support credit markets.
But investors have recently had a second wave of the coronavirus on the brain, as markets fell early on Monday (adding to a pullback last week that saw the worst one-week drop in the S&P 500 and Dow since March). Last week, markets shaved off over 5% amid growing concerns of spiking infections and a somewhat gloomy outlook from the Fed. CFRA’s Sam Stovall says markets were “looking for a catalyst that could cause a correction”— triggering what Stovall calls “announcement anxiety.”
Edward Jones’ Nela Richardson suggests investors have perhaps gotten ahead of themselves—”There is this tendency to be overly-optimistic in a V-shaped recovery without recognizing that it will be harder to turn the lights on than it was to turn the lights off,” she told Fortune. Meanwhile, at this stage of the market rebound, a correction is not out of left field.
In fact, as far as volatility in the market goes, investors should expect a lot more of it. With the “very high degree of uncertainty we’re facing right now, I think we were probably due for a return to higher levels of volatility, and that’s what we got,” Mark Hamrick, chief economic analyst at Bankrate.com, told Fortune.
Top of mind for investors Monday was news of coronavirus spikes in several states across the U.S. like Arizona and Texas (and in China, which is seeing the largest daily increase in cases since mid-April, Bloomberg reported). And even as states reopen, some officials like Governor Andrew Cuomo have been critical about lax attitudes towards social distancing: Cuomo said Sunday there had been 25,000 complaints about violations of reopening standards, sparking fears the reopening may be stymied by reinforced restrictions.
Yet for many states that initially avoided the high infection rates seen in states like New York and New Jersey, the spike may be part of the 1st wave. In that sense, “It’s more appropriate to say this is still the first wave,” suggests Hamrick.
Investors are on edge about the spikes, but Richardson suggests “The market is used to thinking nationally. They don’t think about what’s going on at the local level, and so I think there’s an unfamiliarity in how to interpret local conditions when it comes to a health crisis,” she says. In that sense, she doesn’t “think the market is doing a great job at interpreting what these upticks mean for a national economic rebound, and there’s a disconnect there.”
Stocks did see a boost midday after the Fed announced it will begin buying individual corporate bonds on the secondary market based on a broad index—an update to its previously announced program, the Secondary Market Corporate Credit Facility, that has thus far involved buying corporate-bond exchange-traded funds. “This is yet another sign the Fed is going to do everything under their power to help liquidity. Worries over a second wave? No worries, the Fed is here,” LPL Financial’s Ryan Detrick wrote on Monday.
Some investors, at least, jest there has been no limit to what the Fed has been willing to do to bolster the recovery.
The Fed’s update to the established program also removes the requirement for issuers to ‘opt-in,’ analysts at Goldman Sachs wrote Monday, adding that, “First and foremost, today’s news increases upside risk (i.e., tighter spreads) relative to our forecasts. The Fed’s posture has shifted from a ‘lender of last resort’ towards more of a regular market participant.”
Update, June 15: This story has been updated with a quote from Goldman Sachs research.