Why, after the dramatic drop in March, are prices going up if we are only now beginning to understand the negative effects of the pandemic? Have investors gone crazy or is the market simply right? </p><div> <! - <EdIndex> -><p>After the heavy correction suffered between mid-March and early April (coinciding with the most acute phase of the coronavirus pandemic), stock markets have radically changed their trend, recording substantial increases. Even the Nasdaq has improved its historic highs, reaching more than 10,000 points. <em><br /></em>
“Why are prices going up after the dramatic drop in March if we are only now beginning to understand the negative effects of the pandemic? Have investors gone mad or is the market just right? “, are two questions that have been asked the experts of the BGSAXO Study Center which they try to answer in the following analysis.
While the COVID-19 crisis is plunging the global economy into a deep recession and unemployment rates are hitting record highs, stock markets are showing a remarkable recovery.
Why, after the dramatic drop in March, are prices going up if we are only now beginning to understand the negative effects of the pandemic? Have investors gone crazy or is the market simply right?
- Buy when the market goes down “Buy the Deep”.
Optimism is an important feature of a large number of investors. And despite the severe crisis in the crown, many of them believe – and continue to believe – in good returns. Not only in the long term, but also in the short term. In the current scenario that has seen historic lows, many investors think it is the perfect time to enter or buy at discounted prices.
- Look for performance
The ongoing crisis has not changed extremely low interest rates. On the contrary, the pressure on interest rates and the expectation that interest rates will remain so for a long time have only increased. Investors who were looking for additional returns and therefore said goodbye to liquidity and savings have only more reasons to keep looking for more profitable markets.
- The role of central banks
The ECB, the Federal Reserve and other central banks have seized the crisis as an opportunity for a new and unprecedented wave of liquidity combined with programs to repurchase government bonds and corporate bonds. This creates a huge influx of new money which – as in recent years – is largely leading back to the financial markets.
- Governments pay the bill
The European Commission and the governments of the countries affected by the health crisis are also spending billions to mitigate and prevent dramatic effects on the economy by throwing liquidity “at any cost”. Although governments are aware of the resulting debt, this approach is mitigating the economic damage and providing, among others, major investments in the health sector.
- Technology, technology, technology!
Not only is the medical sector monitored by investors, but the major technology sector also does not seem to be concerned about the global crisis. Companies like Google, Amazon, Facebook, Apple and Microsoft are even considered the big winners. The fact that these so-called GAFAM companies now weigh over 20% of the S & P-500 and that they are central to the Nasdaq-100, explains the excellent performance of these indices.
- China and emerging markets
Europe and the United States have been hit hard and have many deaths attributed to COVID-19, but much of the world has been much less affected by the pandemic. The impact in Africa and Asia is much less and will therefore harm these emerging markets less. This scenario combined with a rapidly recovering Chinese market could drive western economies out of the crisis more quickly.
- Cheap energy
The currently very low prices of energy and other raw materials are certainly helping. Although countries (e.g. Russia) and companies (e.g. Shell) have suffered the blow, this trend is a gift from heaven for other affected sectors, such as air travel. Low energy prices can also get the rest of the economy out of the crisis faster and cheaper.
- Hope for the vaccine
Of course we cannot forget the cause of the crisis itself. Coronavirus. Despite the devastating effect on the economy and businesses, there is a strong security that the virus can be contained and that we can live with it. It also seems certain that a vaccine will arrive it is only time. A large group of investors are already speculating on this good news, which will no doubt give a boost to the markets.
- Looking at the future
But looking to the future is not just about COVID-19. Investors with longer horizons will not let the current crisis put them out of the game. They are observing historical figures and are convinced that corporate profits and dividends will soon return to normal. They will not move away from the market, but will continue to invest, especially now.
- Fear of not seizing the moment (FOMO)
Finally there is the restless group of investors. They have watched the stock market drop, but now they see it rising rapidly. And they are increasingly afraid of missing the train if they don’t arrive on time: The Fear of Missing Out (FOMO). They don’t know if what happens has fundamental and structural characteristics, but it doesn’t matter. They want to avoid the risk of missing a potential opportunity and follow the main trend.
An objective fact is that the markets have clearly moved upwards again in the last month. Of course there are also many negative aspects related to the current situation to be taken into consideration.
Whatever the direction of the market will be one thing is certain, 2020 will be a year that will go down in history.
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