Market Mentality
Will recent stimulus be enough?
As the second quarter winds down, equity markets have continued to defy expectations. Both the S&P 500 and Dow Jones Industrial Average continue their upward trajectory, despite the many unknowns regarding the coronavirus and the state of the global economy.
The extraordinary stimulus that has been poured into economies across the world has helped equities return from the abyss. The U.S alone has authorized more than $3 trillion in emergency stimulus spending to date, and another relief package is reportedly under discussion.
State of employment
All 50 states have begun to lift lockdown orders, with various restrictions in place. However, recent reopenings have coincided with a resurgence in coronavirus cases. This gradual reopening comes as U.S. unemployment fell in May, but remains substantially above average.
Other negative factors that should be affecting markets include reduced consumer spending and protests around social injustice. Yet equities continue to rise, with some stocks even setting record highs — on June 19 alone, 107 stocks hit new all-time highs.
Over the past three months, all sectors in the S&P 500 have moved to positive territory, with most posting double-digit gains. But looking at the year-to-date data, three-quarters of the industries remain in negative territory.
Energy stocks are the performance front-runners for Q2, yet are still down approximately 35% since the beginning of the year. A demand shock from COVID-19, coupled with a supply war between Russia and Saudi Arabia, sent U.S. crude oil prices to their all-time low of $11.57 on April 21.
Oil prices have been on an upward trend as a result of optimism in the economy. However, their forward trajectory remains unknown.
Peter Bryant, managing director of Clareo and an advisory board member for the World Economic Forum’s Mining 2050 Initiative, summed this up nicely:
“The backdrop is that we have no idea if demand will ever get back to the levels that we once experienced….What we will see is the breaking of another norm. In the last 10 years, we’ve seen several industry norms become broken. For instance, U.S. shale production broke the connection between natural gas and oil prices. Now, this drop in WTI has snapped the connection between current and future price.”
Are markets overpriced or will the rally continue?
Veteran investor Wolf Richter, author of Wolf Street, has shorted the entire S&P 500. Richter cited the recent “phenomenal rally,” despite worsening economic conditions, including millions losing their jobs, among his reasons for shorting the market. Richter also noted how investors were buying up shares of Hertz — even as the company declared bankruptcy.
Investors are currently sitting on record piles of cash. Bank deposits and money market mutual funds have risen during the flight to safety. Has the extraordinary stimulus been enough to keep markets on their upward trajectory? As we end Q2 and head into Q3, we will soon find out.
Markets are in constant flux, and the only thing certain is continued uncertainty. To learn more come visit quantumeconomics.io. This information is for educational purposes only and should not be construed as trading advice. Past performance is not an indication of future results.
