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How to Create a Rally 101: Powell Says We Need Vaccine, Media Suggests Moderna Has It, US Stocks Soar

James Hyerczyk

U.S. stocks surged on Monday with the benchmark S&P 500 Index closing at a 10-week high. The catalysts for the rally were encouraging early-stage (and when I write early, I mean really, really early) data for a potential coronavirus vaccine and on the promise of more stimulus to lift an economy beaten down by the pandemic.

In the cash market on Monday, the S&P 500 Index settled at 2953.91, up 90.21 or +3.43%. The blue chip Dow Jones Industrial Average finished at 24597.37, up 911.95 or +4.08% and the technology-driven NASDAQ Composite closed at 9234.83, up 220.27 or +2.83%.

The Catalysts

Throughout most of May, the major stock indexes have been in a trading range. Two factors may be contributing to this. First, after hitting a low on March 23, the S&P 500 Index surged more than 32% by April 30, leading investors to question value given the multitude of issues still facing the economy. In other words, in March investors saw stocks as relatively cheap compared to the all-time highs reached in mid-February and in late April, investors deemed stocks too expensive given the grim outlook for the economy.

Second, investors continued to weigh the hopes of an economic recovery against the fears of another wave of infection as states lifted virus-led restrictions. That jury is still out there in my opinion because of the way the virus spreads. It may take 14 to 21 days after the reopening of a state to see the real coronavirus numbers.

On Monday, investors seemed to want to skip factor number two and move right to optimism over the development of a vaccine.

In watching the price action late Sunday I observed the following. Federal Reserve Chairman Jerome Powell in an interview with “60-Minutes” said that the full recovery is based on finding a vaccine. Later in the session, the headlines read “Moderna Reports Positive Results from Vaccine Trials”. Stocks took off from there.

Coincidence? I don’t know, but it was enough to get investors to jump on the bandwagon.

Let’s Get Real

The base for the rally was created by Powell after he suggested the Fed and the government are not out of ammo to get this economy on the road to recovery. It was his affirmation that more monetary stimulus was on the way if required that should be the key takeaway from Monday’s rally. The Moderna news was just the icing on the cake.

It all comes down to timing. If the Fed sees a problem in the economy then they will act “now” like they did in March and April. That’s what investors wanted to hear. As far as the vaccine is concerned, that’s still not likely to happen for perhaps another 9 to 18 months.

This article was originally posted on FX Empire