There are many aspects that the stock market has been going up, when the most natural thing would be to see a crash amid the COVID-19 pandemic.
There is something curious going on with stocks this month. While the COVID-19 pandemic is advancing across the globe with the economy facing a pause, the market has been rising since the prices of such assets have been on the rise for two weeks now – which gives the feeling that Wall Street is doing very well . The Dow Jones Index has accumulated a 21.8% increase since March 23.
Have investors lost their heads? In view of this, it seems crazy. How stocks may be rising when 10 million people in the U.S. lost their jobs in just two weeks? On March 23, when the hike started, Morgan Stanley predicted a 30% drop in US GDP for the second quarter of this year. We are looking at economic damage in proportion to what occurred in the Great Depression.
Market going up. An inappropriate raise?
To really give you an idea of how strange this rise in the stock markets is, consider the following: the top 100 stocks by market capitalization on the London Stock Exchange rose 2.19% on Monday, while British Prime Minister Boris Johnson came in in an ICU due to COVID-19. This does not seem to be mere optimism. This does not even recall the characteristic and inconsequential euphoria seen by actions at the end of bull runs. This just seems unbalanced.
However, the rise in the stock market actually makes sense, however contradictory it may seem. There are a few reasons for this. The main one is that big movements like this always occur during bear markets. Or as a columnist “Real Money” at the The Street said once the rise in the stock market started, “What you’re seeing is a classic stock seen in bear markets. ”
What are the prospects?
In addition, the main role of markets is to predict the future. The current situation, with thousands of casualties every day, coupled with a lockdown by the end of April (according to Donald Trump), it is already priced. As a reminder, this impressive rise in price came after the 30% faster drop in Wall Street history.
As long as there is no new information, the financial crisis by COVID-19 will pass and the economy will recover. However, there are many uncertainties these days. Scenarios such as the insolvency of large corporations, such as the famous collapse of Lehman Brothers back in 2008, could tip the balance.
Another hypothesis could come from an extension of the lockdown, which would have a direct impact on earnings and consumption reports for the second and third quarters of 2020.
Basic principles of Bear Markets
During calls bear markets, prices move strongly upwards and return everything again. The joke that circulates on Wall Street is that “even a dead cat will peak if you throw it from a height that is sufficient for that.” As markets fall, there is a demand for stocks at a value that guide these strong movements. But it is not enough to let capitulation take place until the market correction is over. In the case of this bear market, this seems to be far from the end.
From top to bottom, the last bear market for US stocks lasted 17 months. This was from October 2007 to March 2009. The crisis of the subprime and a few more corporate implosions in the financial industry were very bad, but they were nowhere near as devastating as the COVID-19 pandemic and the radical measures taken by many governments around the world to contain it.
A little stimulation will favor Bitcoin
The other factor that is fueling this rise is the huge stimulus effort made by central banks and governments around the world. The United States released $ 6 trillion in fiscal and monetary stimuli as emergency relief. This has undoubtedly boosted the markets in recent days. However, not even extraordinary stimulus measures were able to reverse the 2008 financial crisis for 17 months. Will the current movement last much longer? Only time itself will tell.
If it lasts, it could have a positive effect and raise the price of cryptocurrencies like Bitcoin.