The US equity market crashed dramatically in the past weeks as market participants woke up to the fact the US is not immune from events happening in far-away countries. The utter madness that prevailed in the market before the collapse such as the constant hype over Tesla(TSLA) and other hot stocks now looks dumb.These days nobody is talking about how AI is going to change the world or when tourists will be flying to space and other planets on Virgin Galactic (SPCE) spacecrafts. Not to mention the other crazes that have disappeared such as crypto currencies, blockchain, etc.

Though stocks plunged heavily from record highs, in the past 3 days they have shot up like a SpaceX rocket. The Dow is up 21% in just 3 days putting it in squarely in a bull market. The million dollar question is this: Are we already in a new bull market? The answer is an absolute no. According to a recent Reuters article, more huge one-day gains have occurred in the US market during bear markets than bull markets as shown in the chart below:

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Source: Treat with caution: rocketing stocks aren’t cause for comfort, Reuters

From the piece:

All the same, data suggest investors should treat the rally in stocks with caution.

Of the twenty past instances when the S&P rallied 8% or more on a single day, thirteen of them took place when stocks were in the embrace of a bear market.

“These 8% rallies are not necessarily signs of health,” said Christopher Murphy, co-head of derivatives at Susquehanna Financial Group.

In a note on Tuesday, Murphy wrote, “It is important to remember that some of the largest one‐day rallies in SPX’s history took place during bear markets, implying that one day pops are not uncommon in a down market.”

Nor are such sharp rallies a herald of better days.

In 2008, for instance, the two biggest gains during the market crash that fall, both in October 2008, were actually followed by five more months of double-digit declines, data showed.

“You can’t take this bounce and say that (the market) will turn around next week or the week after,” said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.

See also:

• The Dow’s 21% surge in 3 days puts it back in a bull market — here’s why the coronavirus crisis makes it feel utterly bearish, Marketwatch
• We’re Now In a Bull Market? Thank the Dollar, Bloomberg
• Bear-Market Stock Rally Comes Undone in Canada Amid Wild Swings, Bloomberg

Related ETF:

• SPDR S&P 500 ETF Trust (SPY)

Disclosure: No Positions

Viral outbreaks such as the current COVID-19 Coronavirus is not new. We have had many viral outbreaks in the past which all went away after some time. One important difference between COVID-19 and other viruses like Zika, SARS, Ebola, etc. is that most the western world were not impacted by them – at least in a scale we are seeing now. Ebola mainly affected Africa. SARS affected a few developed countries such as Canada but the US was mostly untouched by it. Despite these differences even COVID-19 will pass and things will get back to normal. China seems to slowly getting back to normal as the following articles note:

• As coronavirus epidemic eases in China, life is slowly returning to normal, SCMP, Mar 15, 2020
• Coronavirus: Is China getting back to business?, BBC, Mar 11, 2020
• China’s New Normal, Foreign Policy, Mar 11, 2020

But China put some 60+ million people under strict quarantine before the virus peaked. A similar scenario will play out in Europe and the US before the virus goes away.

That said, I recently came across another chart showed the performance of global equity markets after past viral outbreaks. This chart is similar to the one posted by a Schwab article before. The below chart is from an article by Tim Armour of Capital Group:

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Source: Capital CEO Tim Armour on weathering the coronavirus, Capital Group

Earlier:

• Major World Epidemics and Global Stock Market Performance : Chart, TFS

So the key takeaway for investors is this too will pass eventually. The main thing is not to panic and be patient. Nobody knows how worse things will get before normalcy returns.