COVID-19 cases are shooting up globally, and surprisingly, so is the stock market, leaving some of our clients asking, what’s going on?
Today we’ll discuss some of the reasons for the divergence between the increasing spread of the virus on the one hand and the stock market hitting new highs on the other.
Here are a few explanations:
1. TINA, you may have heard of this acronym: There Is No Alternative
With the rates approaching zero, and cash and bonds paying close to nothing, money managers and investors worldwide have no alternative but to look to the equity markets to generate returns.
Think about all the pension funds that need to meet their future obligations for their pensioners. They have no choice but to move capital from bonds and cash to other investments generating yields, including stocks.
2. There continues to be massive government stimulus in the system.
As we’ve explained in past videos, central banks all around the world issued policies to protect their markets. Much faster and in a much bigger way than in previous recessions.
Policies are very accommodative, interest rates are low, there is easier access to money, and central banks have a long-term commitment to stay that way.
In the eyes of investors, this sets the stage for multi-year growth in stock markets, despite some potential short-term bumps.
3. Cash sitting on the sidelines supports a resilient market.
As soon as there are buying opportunities, the market recovers rather quickly because of all the cash from those who were late to re-enter and excess money in the system from cheap borrowing.
4. And lastly, the recent development of effective vaccines is increasing optimism.
The Key Takeaway
The stock market is forward-looking and is clearly expecting a positive outcome in one to two years.
However, it does not mean we should forget about risk and the benefits of a well-diversified portfolio.
Many factors could sidetrack the positive momentum, and it’s why we continue having an active approach during these unusual times.
On behalf of the entire team at TWM Group, thank you for watching and see you next time.