Market recovering quickly since Q1 crash
Equity markets have started to recover from the crash in the first quarter, but is an economic and market recovery sustainable in the wake of another pandemic threat?
The Covid-19 pandemic has wreaked havoc in the global economy disrupting supply chains, employment and economic growth. However, despite the Covid-19 induced market Crash in the 1st quarter of the year, Q2 2020 has seen much of these losses in equity markets recouped. The below graph highlights the performance of major indices over the first half of 2020.
Low single digit declines for the S&P 500 and Shanghai Composite Index (CSI300) suggest a future return to growth for the two largest economies in the world. If stock markets are leading indicators of economic health, the suggestion is that the future outlook may not be too bad. The recovery has been aided by never before seen levels of economic stimulus, particularly in the US whose multi trillion-dollar rescue package could be increased further in the near term. The stimulus accompanies lower for longer lending rates across virtually all major economies around the world. US unemployment data which spiked from 3.6% to 14.3% has now started to improve faster than expected with the June jobless rate of 11.2%, moving closer towards single digit territory once again.
The extremely accommodative monetary policy is supportive of equity markets which are looking past the current downturn in earnings and growth. As US earnings season begins markets are likely to experience some shock and even disappointment at times, although results will be assessed on performance relative to expectation as well as strength of balance sheet rather than outright profitability.
Risks to the recovery
As long as economies are open and supply chains are reconnected, the benefits of monetary easing can be attained. However, should a resurgence in Covid-19 infections be cause for businesses to close their respective doors once more, the efficacy of stimulus aiding the economy which is disrupted my logistics rather than liquidity will once again come under pressure.
While equity markets have responded positively to the reopening of business and the huge amount of monetary easing, there is a suggestion that valuations on major indices around the world have become stretched and perhaps over optimistic on future outcomes. In turn while further gains may be realised, we are fast approaching a level of overbought territory for equity markets.
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