Five reasons markets have been rallying despite the economy’s dire situation – USA DAILY NEWS

Five reasons markets have been rallying despite the economy’s dire situation

After a huge market rally from the March 23 stock market lows, the most common question we have these days from clients of 5I Research is, ”Why the heck are the markets rallying?”

Certainly, with the world shut down, and 30 million-plus unemployed in North America, and companies having no idea about how sales and earnings are going to look in the next six months, you would think the stock market would be exceptionally weak. Yet, here we are, with a big rally, and some indices, such as the Nasdaq 100 up on the year in the midst of a pandemic, the likes of which the world has never seen.

There are still lots of investors waiting for a retest of the lows, of course, and some Debbie Downer economists are still calling for a depression. But the investors on the buy side of every trade are certainly not buying with a plan to lose money. So what gives? Let’s look at five reasons why the market might be moving higher:

Cash on the sidelines

As markets rallied over the past 10 years, investors got more fearful the higher they went. Nearly everyone was ‘expecting’ a market correction, or even a crash, long before the coronavirus ever showed up. Now, with markets having dipped sharply earlier this year, this sidelined cash is being spent. But there is still $5 trillion in money market funds. Pension plans, meanwhile, likely saw their targeted equity allocation drop significantly in the first quarter as the market plunged. Now, these plans are buying, not necessarily because they think times are good, but simply to get their models back in line.

Earnings have not been so bad yet

Alphabet, Tesla, Microsoft, Twitter, Facebook and Qualcomm all reported good earnings this week, or, at least better than what investors expected. It turns out companies can still grow and make money in a lockdown. Now, most companies are withdrawing all their guidance, but as we will see later, this may not matter so much. Investors have been expecting a disaster in corporate earnings, and, so far at least, they haven’t got it.

Government stimulus was much faster in this crisis

The Fed learned a lot in 2008. Students, laid off employees and small businesses all received government payouts. In some cases, businesses got a $40,000 loan within a matter of days. All this free money is likely going to come back and haunt us for decades, but for now, it is keeping the lights on at many companies, and allowing many consumers to continue to pay rent and support the economy in other ways. Governments know this is not the time to cut back on spending (which is what happened in the 1930s to exasperate the Depression). Gold usually benefits from money printing, and most gold stocks soared in April, which certainly helped the TSX Index.

The timing of the crisis was fortunate, at least for many corporations

Pre-coronavirus, corporate profits were solid. As noted above, for a lot of companies having two weeks of the first quarter in lockdown mode hardly had any impact on first-quarter results. Yes, companies and investors are largely writing off the entire second quarter. But markets look forward. If the first quarter was OK, and no one really cares about the second quarter, it’s time to start looking towards the third quarter. Based on recent virus trend lines, it does look like a lot of businesses will be re-opened for at least part of the third quarter. Schools will likely be back in action in September. Investors may look forward to stellar year-over-year growth comparisons in 2021, when even some growth will look great compared to a weak 2020. If a company was growing fast enough pre-COVID-19, it may still be able to show growth for all of 2020, even without three months of business.

If everything is closed, how can it get worse?

This is the “it’s so bad now it has to get better” market hypothesis. You can’t close a shuttered theatre twice. You can’t close a closed mall twice. Once something is closed, the only question is for how long. Sure, some companies are going to go under. But most will re-open, perhaps slowly at first. But we know for sure they can’t close if they are already closed. There is a one-way ticket here, if one puts on their rose-coloured glasses for a while. And, since retailers and restaurants have figured out how to move some business online, even a store closed to the public can still report some sales. Since investors expect nothing, every dollar in sales is a positive investment surprise.

Peter Hodson, CFA, is Founder and Head of Research at 5i Research Inc., an independent investment research network helping do-it-yourself investors reach their investment goals.