UNLOVED STOCK MARKET – Investors are happy but worried
This is one of the most hated market rallies, and while investors are happy with their share price increases, they are also very concerned.
The global stock market has rebounded from its lowest point on March 23 of this year, even in the face of severe current recession risks. Most investors are happy that the stock markets rebounded, but they can't get the idea out of their heads that we are treading on very thin ice.
While some investors have taken this opportunity to consolidate their profits by executing sales, others have rushed headlong into the markets by buying aggressively in the hope that the markets will reach new highs day by day.
Daily there is a steady stream of good news or tweets about possible vaccines and treatments to cure COVID-19, but nothing is definitive yet. This has caused significant variations in the price of shares of those health companies that claim they are closer to a cure.
On the other hand, the Federal Reserve and the government continue with their psychological and financial support to the markets. Markets now believe there may now be several additional packages to those already in place in 2020.
There are rumors that we could receive another billion dollars next July, continuing the plans to send direct money to individuals, extensions of unemployment benefits, additional credits to small and medium-sized companies, and more bailouts to large corporations. The financial bridge continues and continues to grow as necessary.
More surprisingly, in Europe this week, for the first time, they will issue their first common eurozone bond for an amount of around 750 billion euros or about. This aid package will be distributed among the most affected European countries by COVID. Hopefully, they continue the path towards financial integration.
Although the financial results are still harmful and of great magnitude, they are improving little by little. For example, continuing unemployment claims in the United States fell for the first time from 24.9 million people claiming benefits to 21.1 million in the last report on May 16. Still, it is at a depression-like level, and even then, but it is beginning to improve.
Every day, more economists and analysts agree that the recovery may take at least 12 to 24 months to return to 2019 the levels, but we will require more data points to assess whether the recovery speed is adequate.
In the United States and Europe, confinements have been relaxed and lifted. Everyday business activity is coming back to life as we know that there is still no permanent treatment or cure yet. But more and more governments have decided that there must be a balance between general health and economic stability.
If the capacity of the countries' healthcare system is sufficient to handle new cases of the virus, government authorities are confident that they will be able to balance the risks between health and the economy.
Meanwhile, the "financial bridges" created by central banks and governments support the bullish narrative of the markets and high asset prices, although the risk-to-return ratio looks very adverse.
As we get closer to the U.S. elections campaign, the risks of the 2019 trade war between the United States and China come back to life. And the narrative of de-globalization has reappeared. This new spark in the long-term conflict between these countries might impact international trade, and capital flows again.
Once again, multinational companies with significant sales or supply chains in China and Asia could be affected. This group of companies is highly concentrated in the United States market index S&P 500, where 40% of the company's sales are international, and about half of that is for Asian markets.
We do not know how serious the impact of the conflict between the United States and China will be this time, but the last time was not very pleasant. However, its effect was mainly limited to financial markets and not so much in the main economy.
As investors, we need to think ahead about some critical questions ahead; These would be the questions that will keep us awake at night.
• Will consumer behaviors change after COVID?
• How much will credit and financial aid packages affect the consumption of goods and services?
• How big and massive will business bankruptcies be?
• How intense and volatile could the election campaign be and its impact on market asset prices?
• And how far will the conflict between the United States and China go this time?
We believe more than ever that investors will require a rational strategy, a lot of patience and consistency in their actions to keep their financial future on the right track.