Automatically receive the internet’s most informative articles bi-weekly via our free bi-weekly Market Intelligence Report newsletter (sample here). Register in the top right hand corner of this page.
There is no doubt that America is smack-dab in the middle of a severe recession, unrivaled in magnitude in the past 80 years, yet, you wouldn’t know it by looking at the stock market…How can this be? Why are equity markets rising in the teeth of the storm?
The answer is simpler than it may seem. Markets, first and foremost, are forward-looking vehicles. They focus on the future, not the present or the past, and when markets peer out around the corner, we believe they see three things in particular that spell better days ahead for equities.
1) The expectation of better news
The widely held belief of better news to come…is not an unfounded, overly optimistic expectation…[because,] importantly, the global economy is no longer at rock-bottom…. and, as the economy begins to rebound, so too will the economic data…and it’s this expectation of better economic data that we believe is helping to propel markets forward…
2) Unprecedented fiscal and monetary stimulus
…The second factor in markets’ continued upward climb can be attributed to the speed and vast amounts of fiscal and monetary stimulus injected into the global economy since March. Such levels of government-provided stimulus are unprecedented in the post-World War II era…
- In the U.S….the additional funds…amount to approximately 13% of America’s annual GDP…
- Australia and Canada have passed relief packages comprising similar percentages,
- while COVID-19 aid passed by the UK government amounts to roughly 6% of its annual GDP,
- the European Union is currently floating a response plan of $2 trillion for its 27-member bloc
- and Japan takes the cake with a package consisting of a whopping 40% of its yearly GDP – in reality, likely a somewhat inflated number, but still large by any measure.
Meanwhile, central banks around the world have significantly expanded their lending efforts. [In the U.S., for example,]… the U.S. Federal Reserve will purchase up to $600 billion dollars in bank loans and buy $750 billion of corporate bonds, including high-yield bond ETFs…While the economic damage inflicted has been massive, so too has been the amount of first aid…
3) Low discount rates
…Stocks are ultimately priced on the net present value of a company’s future earnings and, with this in mind, there are two ways to increase the net present value of future earnings: by achieving higher earnings growth, or via low discount rates. We believe that the unprecedented actions taken by the Fed and other central banks since March to lower both interest rates and credit spreads have resulted in very low discount rates today…and should almost entirely compensate for any disruption in short-term earnings, as a company’s required earnings growth over the same time period wouldn’t need to be as impressive…Simply put, a dollar of earnings for a company five years down the road is worth a lot in today’s dollars and if you have strong confidence in the earnings of a company five years from now, you’re going to be willing to pay more for that company’s stock now…
Ultimately, low discount rates mean less concern over the pace of an economic recovery and more of a focus on the fact that such a recovery is occurring. This, in turn, allows markets to have a much longer time horizon. This is why we believe that markets will continue to be very support of equities over the next few months. With Treasuries likely to remain at extreme lows for some time, stocks have essentially become one of the cleanest shirts in a dirty hamper and who among us wouldn’t pay a little extra to snap up the best shirt available?
…Necessary government-imposed shutdowns to control the spread of the coronavirus brought the world economy to its knees in April but, with more of the globe entering the reopening phase, we believe rock-bottom has already been reached. Assuming the spread of the virus remains under control, the economy has nowhere to go but up….[and] equity markets, as forward-looking vehicles, are latching on to this belief. Buoyed by unprecedented fiscal and monetary support from governments worldwide, the stock market has risen from the depths of its mid-March lows on the assumption that brighter days surely must be ahead. Let’s raise a glass to this expectation, and hope it comes to pass.
Editor’s Note: The original article by Russell Investments has been edited ([ ]) and abridged (…) above for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
A Few Last Words:
- Click the “Like” button at the top of the page if you found this article a worthwhile read as this will help us build a bigger audience.
- Comment below if you want to share your opinion or perspective with other readers and possibly exchange views with them.
- Register to receive our free Market Intelligence Report newsletter (sample here) in the top right hand corner of this page.
- Join us on Facebook to be automatically advised of the latest articles posted and to comment on any of them.