Why the Dow rallied 400 points in middle of a global health crisis

The rebound in US stocks continued on Tuesday with the Dow finishing 400 points higher. US markets have been resilient this week in the face of the global coronavirus outbreak.

It’s an abrupt turnaround for markets. Stocks had sold off sharply last week amid worries about the economic impact of the virus. But they began to retrace their sharp losses on Monday.

The Dow climbed as much as 505 points, or 1.7%, around midday. The index closed up 408 points, or 1.4%. The S&P 500 also rose 1.5%, while the Nasdaq Composite surged 2.1%.

The Nasdaq closed at a record closing high, amid a 14% spike in Tesla stock. The car maker briefly crossed $900 a share Tuesday, buoyed by increasingly bullish sentiment from Wall Street and investors covering their short positions. Tesla is the most shorted stock in America.

And the rally isn’t confined to US markets: global equities are all in the green, and even Chinese markets, which recorded their worst day in years Monday, bounced back.

But the global coronavirus is still not over. So what’s behind the excitement?

Chinese stimulus

The People’s Bank of China stepped in this week by injecting billions of yuan to prop up the stock market.

And there might be more: China has helped its markets out in times of trouble before. Back in 2015, when the country’s stock bubble burst, authorities lent billions to brokerage firms to encourage stock buying.

The historical evidence that China is willing to help its markets and economy soothed investors around the world.

“The underlying market hope is clear: central banks will save us, not just from the business cycle, and not just from climate change, but now from global pandemic too,” wrote Michael Every, senior Asia-Pacific strategist at Rabobank.

China is the world’s second-largest economy and is considered the engine for the global economic growth. With a central bank willing to lend a hand, the repercussions from the outbreak could be much more manageable.

Containment

The coronavirus has now infected more than 20,000 people and claimed more than 400 lives, but the rate of new infections appears to have slowed down.

“Public health activities and awareness are key drivers,” said Bespoke Investment Group Co-Founder Justin Walters.

Quarantine measures and travel restrictions — imposed by both governments and companies — seem to be doing the trick.

Solid economic fundamentals

While the outbreak has been raging, economic fundamentals have remained solid for the United States.

On Monday, the Institute of Supply Management’s manufacturing PMI beat expectations and showed the first expansion for the sector since July.

US factory orders for December also beat expectations on Tuesday, rising 1.8%, compared with the consensus estimate of 1.2%.

Friday’s jobs report is expected to be yet another strong showing for America’s labor market, including an unemployment rate around the 50-year low of 3.5%.

With an unemployment rate this low and wages ticking higher, American consumers, who are the backbone of the economy, are strong.

On top of all this, a solid earnings season for American companies also provides a positive backdrop for the market.