Global economies were ravaged buy the coronavirus in 2020, however the same cannot be said for the stock market. Despite an initial slump, markets have since peaked. “The gap between markets and economic data has never been larger,” wrote Matt King from Citigroup.
- Policy Measures
The Federal Reserve and Congress have taken extraordinary measures to inject money into the economy and prop up markets. The Fed’s maneuvers have pumped a huge amount of liquidity in the market and the restored faith of both private corporate bond buyers and equity investors that the central bank is there to back them up.
2. Lack of Profitable Alternate Investments
Moreover, investors government bonds have been yielding low returns, making the stock market the preferred destination for investment.
3. Retail Investors
It appears retail investors have entered the markets while in quarantine. According to Bloomberg, E*Trade, Ameritrade, and Charles Schwab all saw record sign-ups in the first three months of the year, a lot of it amid coronavirus-induced volatility. Overall, it appears that the market is more optimistic about the future than the state of the economy is indicating. There is another facet of this: fear of missing out. The market is rising, and so people are staying in.
4. Strong Earnings
All growth isn’t due to liquidity, and some of it is built on strong fundamentals. Technology companies: Microsoft, Apple, Amazon, Google-owner Alphabet, and Facebook reported strong earnings and make up about one-fifth of the S&P 500’s market value. And the stock market doesn’t reflect the economy in total; small businesses and companies that aren’t publicly traded are being hit hard right now, and that doesn’t show up in stocks.
The stock market is considered to be a leading indicator of the future happenings in an economy. At the onset of the pandemic, it sounded the alarm before the economic data did, giving up 30 percent of its value in the course of a month. The same cannot be said now, and a significant proportion of the optimism of investors can be chalked up to hopes of economic recovery when the pandemic in brought under control.
It is yet to be seen whether the stock market will continue its increasing trajectory into late 2021.