Why is there a market rebound going on?
The economy has recovered almost all it lost
The last couple of months have been a turmoil in the US economy. Due to novel coronavirus pandemic which has forced the whole world to close down a lot of businesses have suffered incredible financial losses. The United States in particular with the highest infection rate in the whole world having 5 million infected individuals and almost 160,000 deceased. It is no surprise that the economy would start crumbling. While Trump’s administration decided to open up the country, the progress is still halted by the increasing infection rate.
It is worth noting that there are huge protests going on all across the nation due to police using excessive force and inhumane approach towards a detained an individual of African American descent, George Floyd, who choked to death on live video. This has caused the Black Lives Matter movement to take the country by storm and start fighting institutionalized racism. However, a lot of people started using these protests for their own gains with rioters and looters clashing with government forces almost every day in most of the major states of the US.
Due to all the ongoing events, it is no surprise that the COVID-19 infection rates are still going up as it is quite impossible to hold a safe distance when there are thousands of people rallying all around you.
Fortunately, things are not as bleak as they seem like at this moment. While the service sector of the economy suffered huge setbacks the US is not built around restaurants and tourism. It has its roots deep inside innovation and technology with some of the biggest brands in the world like Apple, Alphabet, Facebook, Twitter, Netflix, Amazon, and others holding the crumbling economy on their shoulders.
The US federal government reported a 34% market loss over a month in the first quarter as the pandemic has worsened. This is historically the biggest drop. However, it was quickly followed by the biggest 50-day rally in the history of the S&P 500 as well. There are fears of the second coronavirus outbreak though and it is even more reinforced by the failure to introduce additional stimulus measures that some experts say could lead to another major selloff. This is why a lot of long-term investors are contemplating whether they should stay on the course or just leave a lot of money on the table and try to save whatever they already have.
The S&P 500 fell 34% from mid-February to March 23 but rebounded by 38% in just 50 days afterward. This has been reported duly by the Forex Brokers List website that is tracking such changes day and night. The experts are agreeing that there is a “huge disconnect” between reality on the ground and the stock market and it gets even more unbelievable day by day.
It All Makes Sense
The divergence makes sense though and there are several reasons for it. First, we need to understand that the stock market is not the whole economy of the country. It is a big part that doesn’t show how well the whole nation’s finances are managing. Stock market investors are mostly trying to figure out what is going to happen in the future. This means that there is a lot of educated guessing going around. The rebound is showing that these investors are just looking at the future with optimism.
At this moment nearly 43 million Americans have lost their jobs and filed for unemployment benefits. This is 14.7%, which is the biggest since the great depression where it hit 25%. Although the rate slowed down and got better a bit going down until 13.3% in May some economists are still very skeptical of the longevity of this affair. The Federal Reserve Bank of Atlanta has estimated that GDP may fall as much as 51% in the second quarter of the year. This is due to the U.S.’s total economic output dropping 5% in the first couple of months of 2020.
The investors have sentiment coming from the positive outlook on the development of a vaccine, which is expected to normalize the economy when social distancing measures will end. This will most probably cause a rebound in consumer spending and thus retail sales.
For now, experts are quite sure that the 34% decline in the S&P 500 is not indicative of overall long-term damage to the US’s economy. This has been outlined by Preston Caldwell, a senior analyst at Morningstar who also went on to say that the economic data is basically “old news.” As of now, he is sure that most of the market participants are gazing at the second 6 months of 2020 and the start of 2021.
The CARES Act, which is a $2.2 trillion coronavirus stimulus package enacted in early March 2020 has helped the American households with a one-time payment. Apart from this, there are major unemployment benefits where they and a loan program which helps smaller businesses not fall short on funds to pay off their previous debts. The Federal Reserve has also been working tirelessly to make all the necessary funds available for very same businesses.
FAANG stocks that are represented by the very same American technology companies mentioned up above like Facebook, Amazon, Alphabet (Google’s umbrella company), Apple, and Netflix has also contributed a lot to offset the losses in sectors like energy and services.
Future is Uncertain
The year 2020 has been extremely successful in making our future as murky as possible. Unfortunately, nothing is known for certain at this point even more so when it comes to finances. Due to this, it is not a universally agreed-upon opinion that the stock market surge will continue. This is especially true if the investor’s positive outlook on the future of economic growth is not going to turn out to be true.
The second wave of coronavirus is also approaching fast and unfortunately, this means a lot of states would need to further lockdown in a more strict manner to stop the spread this time around. Social distancing measures will seriously strike down consumer spending yet again.
On July 31st, the $600 weekly enhancement to unemployment benefit ended, and unfortunately, there may not be a second $1200 stimulus package coming. It is also true that most of the smaller businesses have already depleted their Paycheck Protection program loans and now are on the verge of collapse again.
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