“Why is the Stock Market Going Up?”
Despite record unemployment levels and economic uncertainty that we haven’t seen since 2008, the stock market continues to rally from it’s lows in late March. From January 1st, 2020 to March 23rd, 2020 the S&P 500 index was down 31.3%. In contrast, from March 23rd, 2020 through May 11, 2020 the S&P 500 index is up 30.9%! We all know the economy has not made a miraculous recovery since late March, so why is the stock market continuing to climb higher? In general, stock market pricing is how investors see the economy panning out rather than the current reality we are in. In other words, stock market prices are trending higher because investors see improvement in infection rates coupled with legislation implementation as being sufficient actions to get us through to the other side of the pandemic.
Slowdown in the rate of infections
While we all want to cheer for the slowdown in infection rates across the U.S. many health officials are warning that we are not in the clear yet. A USA today analysis focused on 650 counties across the U.S. that report consistent daily case counts and as of April 24th 168 of those counties reported a significant slowdown from the prior week (meaning half as many cases as the week before or less). While one week doesn’t constitute a trend to hang your hat on, it is encouraging that certain hard-hit areas are seeing light at the end of the tunnel. As certain states come into their second or third week of eased restrictions it will be important to watch how their infection rates pan out since most positive test results are lagging indicators of the present situation.
Dramatic Fed Policy Decisions
Early on in the Coronavirus pandemic, the federal reserve responded with interest rate drops that spooked the market. It was not so much that the Federal reserve dropped rates, but more about the fact that they dropped in large increments and also held emergency (out of normal cadence) meetings to do so. Those moves were seen as a knee-jerk reaction at the time but have since proven vital. These interest rate cuts, along with quantitative easing measures, and increased liquidity that the Fed have pumped into the financial markets are now being seen as swift and decisive enough to match the negative economic impacts from the virus. While the Federal Reserve has left the door open for more moves in the future, the markets are showing they are pleased with the amount of support they have brought for now.
Stimulus and CARES Act Legislation
Much of the Federal Reserve moves are helpful but not immediately felt by individual Americans across the country. That is where the CARES act comes into play. On March 27th, 2020 Congress and the President approved the Coronavirus Aid, Relief, and Economic Security (CARES) act. Highlights from this act include the PPP program for small businesses, the Economic Injury Disaster Loan program, improved unemployment benefits, retirement account withdrawal penalties waived, individual stimulus checks, increased testing, and airline support. Any program of this size that is rolled out this quickly will have its fair share of issues, but again the markets see this act as a huge step in the right direction. Small businesses are being supported and individuals are getting a lifeline (albeit small in the grand scheme of things).
These trends of infection rate slowdowns, federal reserve policy, and CARES act legislation seem to be the main themes that are propping up the stock market. In no way does this mean we are completely out of the woods when it comes to stock market volatility. It simply suggests that investors see these actions as being sufficient to support the economy through a staged recovery throughout 2020.