With equities surging into the close ahead of the weekend, traders are shrugging their shoulders wondering how the hell the market is rallying given the economic damage inflicted by the COVID-19 outbreak, which has been cited as the worst pandemic to hit the United States since the 1918 Spanish flu.  This leads to the question, how did the stock market perform during the Spanish flu outbreak?  The chart below compares the performance of the DJIA to the weekly mortality rate of the Spanish flu during each of the waves of that pandemic from mid-1918 through early 1919 (as cited in a WSJ article earlier today).

Looking at how the outbreak of the Spanish flu played out, there were basically three different waves of the virus (red line).  The first wave in the summer of 1918 was a relatively mild one compared to the other two, and the DJIA’s performance during that wave was essentially flat as it never declined more than 3%.  The real damage from the Spanish flu was in the fall of 1918 when the mortality rate spiked up as high as 24 per 1,000 people per week.  During that wave of the pandemic, which also came in the thick of a post-WWI recession, the DJIA peaked just as the wave was getting underway and fell for the next three months.  Even with the severity of the outbreak during that wave, though, the DJIA never fell more than 11% from peak to trough.  On a comparative basis, even after the 28% rally over the last four weeks, the S&P 500 is still down 15% from its high. Obviously, comparing two periods more than 100 years apart is hardly an apples to apples comparison, but it’s still interesting that during what was an even deadlier pandemic in 1918, the DJIA never even approached anything close to a bear market.

Looking at the chart, the DJIA’s low of the decline coincided with the second wave of the outbreak just as the third (more mild) wave of the pandemic was getting underway.  Furthermore, during that third wave, the DJIA kicked off what was a strong rally of more than 25% in less than three months on optimism over an end to the outbreak.

So, once the mortality rate of the Spanish flu dropped down to zero, it must have been nothing but clear skies ahead for the Dow, right?  Well, not necessarily.  When it comes to the stock market, there’s always something.  Less than a year after the mortality rate from the Spanish flu dropped down to zero, the US economy actually went into a year and a half long recession.  That contraction was so severe that it has been dubbed the Depression of 1920/21, one where unemployment topped 10% and deflation was as high as 18%!  The bear market that accompanied that recession was also severe as the DJIA declined 46%.  Imagine coming out of a pandemic with nothing more than an 11% correction and then getting socked with that! Start a two-week free trial to Bespoke Institutional to access our full range of research and interactive tools.

Gold (GLD) has had an interesting run over the past year.  Last spring, the ETF for the yellow metal finally pressed above multiyear resistance roughly around $130. After surging through late summer, GLD continued its rally at the end of 2019 and early 2020 before turning sharply lower alongside stocks in March. But since its March 19th low it has gone on to rally over 17% as of today and is now at its highest levels since early 2013.

Another precious metal, Silver (SLV), has not been as fortunate.  Although it shared in the rally last spring and summer, SLV has yet to eclipse its early September highs. While gold had broken out again in February and March, silver put in a lower high before plummeting to its lost level since 2009 in mid-March.

But since that low on March 18th, SLV has actually outperformed rising 27.83%. Gold is up only up 15.14% since that same day and 17% since its respective low one day later on March 19th. While the S&P 500’s (SPY) low was not put in place until a few days after gold and silver on March 23rd, since March 18th, SLV is also outperforming SPY’s 15.97% gain.

Over the long term, though SLV is still the worst performer of the group.  As shown in the chart below, SLV is down 8.84% over the past two years while the S&P 500’s gains have also been somewhat lackluster thanks to the most recent sell-off with only a 4.11% gain. Gold, on the other hand, has outshined the other two having surged 26.93%. Start a two-week free trial to Bespoke Institutional to access our full range of research and interactive tools.

The equity market’s rally off of the bear market low on March 23rd has taken pause with the S&P 500 more or less flat over the past week.  With a lack of a push higher, optimistic sentiment has waned. The American Association of Individual Investors‘ weekly sentiment survey saw 34.86% of respondents reporting as bullish this week. That is down 1.7 percentage points from last week.

That is not to say those investors have turned into pessimists though.  Bearish sentiment is also down this week, falling to 42.75% from 44.7% last week.  Bearish sentiment is now at its lowest level since the first week of March.  Granted, it is still the predominant sentiment and is very elevated at over one standard deviation above its historical average of 30.42%.

With fewer investors taking a bullish or bearish stance, an increased share are reporting neutral sentiment which is now at 22.39%.  Neutral sentiment has been very muted recently with this week marking the first time since the first week of March that more than 20% of investors are reporting as neutral.

Despite their moves this week, bearish sentiment remains elevated while neutral sentiment remains stretched to the downside.  It has now been six straight weeks in which bearish sentiment has been extremely elevated (over 1 standard deviation above its historical average) while neutral sentiment is extremely muted (over 1 standard deviation below its historical average). That is now tied with another six week long streak ending in September of 2007 for the longest such streak in the history of the survey.  In other words, although things have improved a bit in the past couple of weeks, investors have been decidedly bearish by this measure for a historically long stretch of time.

The bull-bear spread echoes this as this week marked the eighth consecutive week in which the spread has favored bears.  As shown in the table below, that is far from the longest streak in the survey’s history, one that ran for 22 weeks in 1990 holds the record, but it is significantly longer than most others. The current streak is the longest since another one that ended at eight weeks long in February of 2016. Start a two-week free trial to Bespoke Institutional to access our interactive economic indicators monitor and much more.

Yesterday, we highlighted the collapse of the first of the April regional Federal Reserve indices which was from the New York Fed. This morning, we got an update from the Philadelphia Fed, and the results were not much better. The headline index fell from -12.7 in March to -56.6 in April.  That is the second-lowest level of the index on record behind the record low of -57.1 back in July of 1980. That deterioration has come very rapidly. As recently as February, before COVID-19’s impact had been fully felt, the index was at 36.7 which is at the upper end of its historic range in the 97th percentile of all readings.  In just the last two months, though, the headline index has experienced its two largest declines on record: -43.9 this month and -49.4 last month.

The components of the index are similarly at or near record lows.  As shown in the table below, indices for demand and employment all experienced their largest declines ever this month. Overall, demand is weaker while delivery times are longer as both prices paid and received fall.

Demand is one of the key areas of weakness in the regional Fed reports.  The indices for New Orders and Shipments have both fallen by their largest amounts ever to record lows.

As a result of weak demand, prices are beginning to fall.  The Prices Paid component is now down to -9.3 which is its lowest level since May 2015. Prices Received, on the other hand, is even lower at -10.6, which is the worst reading since July of 2009. The 17.4 point decline this month was also the fourth largest month over month decline for Prices Received on record.

Last month’s report had yet to capture the massive drop in employment as a result of COVID-19. That changed this month with the index for Number of Employees cratering to -46.7. That is the second-lowest reading ever behind March of 2009 when it fell to -51.5. Meanwhile, Average Workweek is down to its lowest level ever at -54.5.  Start a two-week free trial to Bespoke Institutional to access our interactive economic indicators monitor and much more.