A bounce in stocks is likely to face a test in the coming weeks as investors try to gauge whether countries and US states emerging from lockdowns can arrest a sharp fall in economic growth without provoking a resurgence of coronavirus cases.
The S&P 500 has rallied about 30% off its March lows, fueled by monetary and fiscal policy designed to stimulate the economy after the United States ordered country-wide lockdowns to stop the spread of the novel coronavirus, which has surpassed 1 million cases in the United States.
With some optimism that the virus is peaking, 22 states, accounting for 38% of gross domestic product, may be open within the next 10 days, according to a tally by Fundstrat.
"If you see a number of cases for a particular state that has opened up early starting to increase... that is going to be a worrisome sign," said Robert Pavlik, chief investment strategist at SlateStone Wealth. "Because then this progress that we have made starts to get halted and... the market becomes more nervous that this is going to be a more protracted, slower restart."
Investors are eager to look forward after the devastation the shutdowns have already wrought. Data this week showed the US economy contracted in the first quarter at its sharpest pace since the Great Recession.
Another measure of the fallout will come next Friday, when the US government releases the country's employment report for April. The US economy is expected to have shed 20 million jobs for the month, according to a Reuters poll.
As states allow certain businesses and activities to resume, investors are seeking to determine if an eventual recovery will be "V-shaped" or one that is more drawn out.
A study by Goldman Sachs found that initial reopening timelines in other countries have often proven "too optimistic" and recovery is quicker in manufacturing and construction than in consumer services.
One state in focus is Georgia, which lifted a ban on eating in restaurants this week. Texas and Florida, two of the most populous US states, also announced plans to start reopening imminently.
Investors will also keep a close eye on reopenings in Germany, Europe's largest economy, as well as other countries.
In China, for example, "simply opening has not necessarily resulted in a return of consumer buying," said Rick Meckler, partner at Cherry Lane Investments in New Vernon, New Jersey. That issue is particularly important in the United States, where consumer spending accounts for more that two-thirds of economic activity.
The metrics investors will be looking at include state-level information on unemployment claims or less-conventional data, such as online restaurant reservations, according to Mona Mahajan, US investment strategist at Allianz Global Investors.
Market watchers also say how asset prices react will be telling, in particular the performance of "cyclical" sectors such as financials, industrials, energy and materials, which are expected to be stronger in an expanding economy.
Those sectors have outperformed this week, a potential sign that investors may be taking profits in market leaders such as technology and rotating into areas that have lagged.
"Typically, when you come out of a recession you do see the cyclicals start to lead a little bit," Mahajan said.
"There is still some wariness about how this reopening goes," she added, "but broadly speaking, if you start to see a little bit of a rotation, it may be because we are getting more (investor) confidence in that reopening."
Michael Arone, chief investment strategist at State Street Global Advisors, is also closely watching shares of banks, which "sit at the heart" of bankruptcies and credit defaults. The S&P 500 banks index has slumped 35% so far in 2020.
"If their performance tends to do a bit better," Arone said, "it might signal to me that folks are pricing in a recovery that might be coming sooner or better than perhaps anticipated."