How the US stock market bounced back

How the US stock market bounced back

The stock market recovered in less than five months. Here is why even the most bullish trader would never have bet on such a rapid turnaround.

After the Wall Street Crash of 1929, it took shares literally decades to regain their previous peak. After the global financial crisis of 2008, it took years. Amid the ongoing COVID-19 pandemic, it has taken less than five months—from a low on March 23—for the S&P 500 to regain its lost ground and hit a new high.

There are five principal reasons why:

1. Federal Reserve action

As soon as the market began crashing in March, the Fed moved to reassure investors that it would go to any lengths to support the world’s biggest economy and prevent a financial crisis. As in the aftermath of the collapse of Lehman Brothers in 2008, it cut interest rates to zero; it promised to pump $5 trillion into money markets; it created lending programs to help the cash flow of US businesses big and small; it bought corporate bonds.

According to Mark Haefele, chief investment officer at UBS Global, the rally on Wall Street and the recent fall in the US dollar are “being driven primarily by central bank policies of adding unprecedented liquidity to markets through renewed quantitative easing and ultra-low rates.”

2. The tech giants

The lockdown has been disastrous for some sectors, notably hospitality and airlines, but millions of people stuck at home has been great news for the five big US tech giants—Apple, Amazon, Facebook, Google, and Netflix.

Dhaval Joshi, an analyst at BCA research, recently said that the S&P 500 should be renamed the S&P 5 because it is now so dominated by Silicon Valley. Currently, healthcare and technology businesses account for 40% of the total value of the US stock market.

3. Normal life is resuming

The US economy contracted by almost 10% in the second quarter of 2020, but Wall Street is looking towards the future. Regardless of a potential second or third wave of COVID-19, social and economic activity is picking up and unemployment coming down—albeit in a somewhat stop-and-go manner.

4. A medical breakthrough?

The devastating economic impact of the pandemic spurred a worldwide race to find a vaccine. Normally such a process takes years, but there are hopeful signs—notably from researchers at Oxford University—that we may have a vaccine sooner rather than later.

A vaccine will not be widely available until 2021 at the earliest and the chances of failure are high. Nevertheless, vaccine optimism has helped boost not just pharma shares but Wall Street stocks generally.

5. There is no alternative

In the early stages of the current crisis, investors dumped shares and parked their money in traditional safe havens such as cash and US treasury bonds. But the actions of the Fed and other central banks have made these options less attractive.

Interest rates for savers are barely above zero, and in some countries the interest rates (yields) on government bonds have turned negative, which means investors have to pay the state for the privilege of putting their money in a safe asset.

Cautious optimism

The risk, of course, is that this heady market optimism could come crashing down quickly. Some investors, including Norway’s sovereign wealth fund, say the current bullishness is risky at a time when the coronavirus has yet to be beaten. Trond Grande, the fund’s deputy chief executive, recently stated that he did not believe the pandemic was under control “in any shape or form.”

2020-08-28T20:02:33+00:00

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Paul Imison
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