Why Is the Stock Market Booming?

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The current pandemic has brought nothing but social upheaval, death, despair, and an unnerving number of people filing for unemployment benefits. Even with the load on government systems, the number of people out of work and filing unemployment is at least 10 times the previous record. Businesses throughout the United States and the rest of the world are shuttered. Many of them may never open their doors to the public again. Second-quarter economics are staged to shrink as much as, or perhaps even more, than what was seen during the Great Depression of the 1930s.

Why Is the Market Up?

At the close of the market earlier this month, the S&P 500 was up a full 25 percent on a recent low of less than a month before. Even though it is down some 14 percent on the year, the S&P 500 is still up from levels of just 11 months ago. The question begs, “How can an economy that is in free-fall and a stock market that is performing well be rationalized?”

There are two forces at work, and they are pulling on opposite ends of the rope. Commerce has been disrupted beyond all recognition. Simultaneously, investors in stock are betting that Washington will intervene, which it has done. The Federal Reserve announced an additional $2.3 trillion in lending programs that it hopes would be sufficient to enable major corporations to emerge from the effects of the coronavirus pandemic with minimal damage to their long-term profitability.

Perhaps we are witnessing a battle between an economy in free-fall and a Federal Government firing up the money printer. At least, in the stock market, the money printer is in the lead.

Gene Goldman, the chief investment officer of Cetera Investment Management, believes that what appears to be an extremely high number of unemployment claims may be viewed as helpful to the market. Mr. Goldman thinks the shockingly high number of unemployed might put pressure on Congress to ramp up rescuer efforts beyond that already enacted. Mr. Goldman went on to say, “High unemployment creates more bipartisan pressure to support the government’s next stimulus package.”

Some analysts are suggesting a relatively mild hit. They believe companies that make up the S&P 500 may suffer an 8.5 percent decline in 2020 earnings. They also suggest revenues will fall a scant 0.1 percent.

Technical Factors

Saudi Arabia and Russia have reached an agreement to reduce oil output. This news has caused a rally in oil prices. Any increase in oil prices is good news for oil companies that have taken a beating by the free-fall price in crude oil.

Long-term interest rates are being pushed down through the redirection of money into safe investments. This action appears to be true for private investors and the Federal Reserve.  This makes weak future earnings more appealing than they would have been before the period when interest rates were higher.

If this virus does not go on for more than six months maximum, from the time the economy was switched off, until it is reignited, then markets have factored this in and are looking ahead. In the event, the crisis goes for three or four quarters; it might be a different story.

Financial markets are betting that there will be a return to an approximation of normalcy in the not too distant future.

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