After watching the market surge ahead recently, you’d think everything in the economic world was hunky-dory. The S&P 500 has bounced 40% off its March low and the Nasdaq (tech stocks) is up 7% YTD and near an all-time high. A persistent global pandemic that has killed 105,000 Americans and second quarter GDP that could fall 50% do nothing to curb positive market momentum. Investors seem to be ignoring life-altering feelings and focusing instead on the future return to normalcy post-coronavirus shutdowns.
Investors continue to view the fight against COVID-19 as the main indicator of future economic growth. This is why murmurs of vaccine breakthroughs and states reopening drive more stock market action than other current events.
After credit markets seized up in mid-March, liquidity became constrained, exacerbating the stock market drop. Enter the Federal Reserve Bank (the Fed). They stepped in to backstop the repo and bond markets, buying bonds and providing a fluid means for many businesses, households and local governments to access desperately needed loans. This move by the Fed was unprecedented and far surpassed their actions from the last recession in 2008. It’s also most likely the trigger for the subsequent rally in stocks.
While the Fed has instilled short-term market confidence, companies and investors continue to grapple with uncertainty surrounding the duration of the downturn. Is the worst over? Health experts debate how and when economies should reopen while many states are already easing shelter-in-place measures. Unemployment numbers are staggering (while backward-looking), but the market assumes those job losses are primarily Covid-19 related and will likely recover over the coming months and quarters. The divide between stock winners and losers widens since the market sell-off, with large companies falling less than smaller companies, and the strong getting stronger. Market exuberance and market fundamentals jockey for the lead.
Many unknowns remain and the potential economic outcomes are numerous. The consumer has been the engine driving the market for years, and pent-up buying demand is seen as likely continuing that behavioral tendency in the coming quarters. Volatility remains, as does abundant caution, but resilience is strong. People want to move beyond the crises. The market is forward-looking and, right now, it’s discounting pessimism and favoring optimism. Right or wrong, the market is climbing a wall of worry. An investment icon, Warren Buffett, thinks better days are ahead for the U.S. economy. “Nothing can basically stop America,” said Buffett, chairman and CEO of Berkshire Hathaway, at the organization’s recent annual shareholder meeting. “The American miracle…has always prevailed and it will do so again.” Only time will tell whether the current market recovery is sustainable.