Wed, 08/19/2020 - 18:24
The world was certainly shell-shocked at the beginning of this crisis when US equities lost 33% almost overnight. It was the fastest decline since the infamous 1929 crash and left many wondering whether things would ever return to normal. All the experts said it would take many months, perhaps even years, to revisit previous highs.
Imagine what would have happened if, back in March, you told an investor who had just lost a third of their portfolio’s value that by August they’d be back in the black. You’d have probably got a laugh (or punch) in the face! Everybody was sure that risk assets wouldn’t recover until the virus was under control, or a vaccine was in production. But, as it turns out, just as the US finds itself in the grips of a second coronavirus wave, we’re seeing the flagship S&P 500 index record fresh peaks.
Unanticipated but somehow predictable
While this lightning-fast recovery was definitely unexpected, it is explainable. Apart from the high probability of a working vaccine in the near future, the Fed has to be given much credit for its response to the crisis. Since Day 1, it has had the printing press working at near full capacity, injecting unprecedented amounts of cash into the country’s economy. To put things into perspective, the US regulator printed more money in June this year than it did in two whole centuries (1776 to 1979). On top of that, it also slashed its already low funds rate from 2% to 0.25%.
The US government also deserves some praise for its efforts to support consumption during a time of record job losses across its services-heavy national economy. Apart from providing $670 billion worth of funding for SMEs to ensure that people would have jobs to return to after the lockdown ended, it also passed the revolutionary CARES Act. This surprisingly generous package worth a whopping $2.2 trillion gave ordinary Americans $1,200 a month to help them deal with the economic impact of the COVID-19 pandemic. It should be noted, though, that this initiative expired at the end of July – more than two weeks before this new top was recorded – and a new deal is still yet to be agreed by Congress.
A final factor worth considering is the highly sector-specific nature of the crisis. Some industries like air travel and energy have been decimated by the pandemic and are still far from anything approaching normal levels of activity. Tech stocks, on the other hand, have positively thrived in this era of quarantine and social distancing, and are up an average of 25% YTD. Because the S&P includes several growth-leading tech firms like Amazon, Alphabet, and Zoom, their good fortunes are somewhat masking the poor performance of other companies in the index. Let’s not forget that the NASDAQ hit new all-time highs way back in June – just a matter of weeks after the initial crash.
Get in on the action with Libertex
Whether you think this recovery is artificial and just begging for a correction, or you believe that the downturn has been banished for good, you’re always welcome to throw your hat in the ring with Libertex. And because we offer both long and short trading on a range of indices – including both the S&P 500 and NASDAQ – we can help you invest your capital regardless of which way you think they’re headed.
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