Over the past few months, unemployment rose to all-time highs and corporate profits dropped as COVID-19 rippled across the globe. Despite the impending economic collapse, financial markets recovered quickly after the initial downside shock of the pandemic and still remain strong. In April, the S&P 500 experienced its best month in over 33 years. The obvious question that comes to mind is why the financial markets continue their “bull-ish” rise when COVID-19 continues to disrupt everyday life.
Chair Jerome Powell and the Federal Reserve have been pulling out all the stops to ensure that we don’t experience economic catastrophe. Interest rates have been cut to nearly zero, in order to encourage spending and to prevent individuals from stockpiling their savings as cash. They also initiated the CARES Act, a stimulus bill that has pumped 2 trillion dollars into the U.S. economy. Many know of it as the stimulus check that has been going out to normal Americans, but it also includes a provision that allows bailouts for large corporations in the face of financial crises. The indication that the federal government is willing to pull out all stops to protect large companies helps to ease overall market sentiment and stress significantly and reduces the tail risk of a severe
Investor psychology plays a critical role within the stock market, and it is possible that the stock market is focused on recent success stories and hopeful news. Restrictions in some states are beginning to loosen, and clinical trials for vaccines and treatments are well under way, among other positive news. Simply put, if the markets are feeling optimistic about the future, equities which are anticipatory assets can perform positively on future expectations even if the current situation has not improved significantly.
Massive tech companies have done much of the heavy lifting during this time. We may look at indices like the S&P 500 to gauge market conditions, but it is worthwhile to note that the S&P 500 is based largely off of market cap, or the value of companies within the stock market. Companies with higher market caps, like Microsoft, Google, and Amazon, are thus weighted more in the calculation of the S&P 500. When you see the increases in S&P 500, therefore, this boost might be largely explained by these heavy hitters.