A number of people may be wondering why stock markets are way off their lows (up 30% or more since the end of March) while tens of millions of Americans have lost their jobs due to the COVID-19 shut downs, had their work hours cut, or have lost some or all of their income. Millions of Americans are in a financial crisis. While I do not know the answer why the stock market is at where it is at (and no one does), we do have a couple important factors to point out and think about. These are basic financial literacy concepts that apply to any investing, not just during the Coronavirus COVID-19 pandemic.
Stock markets are forward looking
Maybe the most important thing to learn about stock markets is that, in a perfect world, they are “forward looking”. What does that mean? This means that the news you are seeing today about the Coronavirus, the tens of millions of people who have had their employment impacted or lost their jobs, the miles of cars lined up at food banks, etc. all of that is “old news”. Stocks try to trade on what the future may bring.
When it comes to why the markets have gone up as people lose their jobs and as the economy collapses, my educated guess is that the markets are looking out and trading based on next year or even 2022 company earnings. As the fact is that eventually there will be vaccine(s) and/or treatment(s) for Coronavirus. This is not some pandemic that has no end point. At least that is the common opinion at this point. (If that opinion turns out to be incorrect, then look out below!)
While I doubt the economy will bounce back on a rubber band and everyone will get their jobs back once COVID-19 gets under control, it is more likely that millions of people will get their jobs back, or similar positions, in the near future. And while it may take years, then as the months or years go on the economy will hopefully slowly but steadily “heal”. I think this is what the stock market is trading on…the fact things will get better.
In fact, I was surprised the markets were trading so high in January/early February and it seems like they totally discounting COVID-19 and were not trading on the possible future impact of it. That too me is more of the the surprise during this time-frame, as in theory markets in January or so should have looked forward to the likelihood of Coronavirus spreading. (But I was watching and I got my N-95 masks in mid to late January!)
The government and Federal Reserve are printing money
The federal government just poured over two trillion dollars into the economy to try to combat the Coronavirus and help the tens of millions of Americans who jobs were impacted. In addition to those funds, the Federal Reserve is also creating trillions of dollars as well a buying treasury bonds and corporate debt among other assets. Other governments around the world, as well as central banks, are also pouring money into economies around the world.
While everyday Americans are not getting all that money in their pockets, those activities (from the Federal Reserve) do reduce interest rates, they in effect reduce the amount of bonds for other investors to buy so investors may then buy stocks (thereby pushing the markets up). It is bound to account for some of that 30% increase.
The point being on this financial literacy exercise is that those trillions of dollars being created need to go somewhere, and some of it will end up in the stock market – pushing stock indexes higher. In addition, federal government stimulus funds sent to individuals create demand for goods. This also creates demand for other assets as the money needs to go somewhere, and some of it is also bound to go into the stock market, those pushing equities higher. Now of course there is bound to be long term negative consequence, such as adding 2 million plus to the national debt, but I guess the way the world works is that is a problem for some future date.
Will stocks continue to go up during COVID-19 pandemic?
As we wrote about, no one for sure knows what the future holds or why the market does what it does. Any financial advisor who says they know, or makes promises, be vary leery of them. But there are two major factors that could explain why the stock market is way off its bottom as COVID-19 spreads, and that is (1) stocks are forward looking and also (2) due to the trillions of dollars being created by the government. Will it continue? Who knows. It does seem unlikely that it can go much higher until there is more visibility into the Coronavirus impact and cure, but it is also not surprising the market has bounced back in a major way from its lows.
By Jon McNamara