Why is the stock market rallying when everything is falling apart?

Despite record-high unemployment numbers around the globe, millions of companies closing and tens of thousands of people dying globally, the stock market has still managed to recover significantly from its lows in mid-March and has some pundits saying that this is perhaps the start of another bull run.

US initial jobless claims. Source: NY Times
Vanguard Total World Stock ETF (VT) as a proxy for global stocks. Source: Google

Is the stock market really disconnected from reality? Could it be another bull trap? Have we all lost our minds? Here are my thoughts on this phenomenon.

Containment measures have effectively slowed the virus spread

We have witnessed a global lockdown of unprecedented scale in varying degrees of severity. Some countries like Italy and New Zealand have completely shut all stores except the bare essentials while others like South Korea and Hong Kong have less drastic measures with no lockdowns, just masks, and tracking apps to help in contact tracing.

Regardless of the approach taken, these containment measures have been effective in slowing the spread of the virus and brought the rate of new infections down in many countries.

As businesses reopen and people re-emerge from their homes and wander out into the public, the potential reignition of economies have boosted investors’ confidence and risk-taking appetite.

We have also seen revenge spending in China, where shoppers are spending a lot more to make up for those lost months. Some businesses are also charging additional fees or COVID19-surcharges to recover some of their lost income during the pandemic and to make ends meet.

The potential business recovery and uptake in revenues will see economies bounce back from their slumber.

A potential vaccine in on the way

There are drugs and vaccines currently being developed and put on trial worldwide, in the UK, China, the US, and in many other countries.

In fact, vaccine discovery efforts are being accelerated as a priority agenda for the US, Europe, and China, who have all committed a significant amount of research resources and at the same time speed up regulatory processes. Competition for the vaccine is adding on to the pressure as well, with countries like the US taking large pre-orders to vaccines and blocking foreign access to them.

With large scale vaccination coming, we can expect the virus to slowly die down in communities that have been immunized to the virus.

The virus “wasn’t as bad as thought to be”

The prices that you see on the stock market today is a reflection of expectations about the future, not the past.

Perhaps as the pandemic unfolded, many investors were very uncertain about how the future would play out, hence many of them sold their positions rapidly and heavily, resulting in extreme volatility in the market with 7% moves each day.

We are now seeing these expectations being recalibrated and reviewed as new information flows into the picture every day.

Positive developments in the area of vaccine development, virus containment and success stories around the world (e.g. New Zealand, China, Hong Kong) have led to some optimism in the stock markets.

The US Fed is printing unlimited amounts of money

The US Central Bank has shown its commitment to borrowing and printing trillions of US dollars to fund its stimulus checks, massive relief programs, and even prop up the corporate bond market with unlimited money in an emergency lending program.

The era of easy money seen during the financial crisis in 2008 may well be back, with quantitative easing propping up the Fed’s balance sheet to almost US$7T.

The Fed’s balance sheet visualised. Source: Visual Capitalist

There is no alternative

Perhaps there is no alternative asset to owning stocks. With interest rates falling close to zero, where else can investors find yield on their assets?

There’s some bargain to be had in the stock market, and investors quickly scooped up stocks at cheap prices. Many short-sellers have also resorted to covering their positions, sending the stock market further up as they buy back the shares.

Investors who have sat out for years waiting for a stock market crash have also started putting in their money to work.

With interest rates so low, cost of borrowing dirt cheap, unlimited money printing by the Fed, resurgence in optimism and eventual recovery in the economies, it’s not difficult to see why the market is going up.

What are your thoughts?


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