We witnessed the deepest single-day market dive in history take place in March of 2020, shaving over 30% from market benchmarks in a single week as panic struck due to COVID-19 beginning to make its mark in North America. Equally shocking was the fact that the Dow Jones and S&P500 floated back up to their pre-Covid evaluations less than 3 months later. As cases started rising in tandem with unemployment rates, the stock market was suddenly booming. The irony here has puzzled investors and economists alike.
What Made the Market Explode When the Economy Was at its Worst?
- Federal Intervention
“Don’t Fight the Fed” is one of the most common sayings in finance for a reason. The Federal Reserve printed over $1 trillion in 2020.
The newly minted cash was used to purchase treasuries and stimulate the economy... And by the economy, we mean the stock market. As we have realized this year, the economy isn’t the stock market, and the stock market isn’t the economy.
As billions of dollars poured into the market, savvy investors saw pandemic-induced lows as a massive discount on fundamentally strong companies, with their buying driving previously beat down valuations back up to regular levels. This of course, did absolutely nothing to help small businesses, consumer spending, and anyone who was not an investor, further highlighting the divide between the market and the economy.
- Interest Rates
Although low interest rates did contribute to a somewhat healthy housing market rebound in 2020, that wasn’t their only effect.
With interest rates plummeting to levels barely above the standard rate of inflation, the focus from bonds and conservative money market instruments shifted heavily into equities. If you were a wealthy investor only earning 1-2% on your
Equities, normally known as a comparatively riskier method for growing your wealth – not storing it – suddenly became the go-to strategy for high-net-worth individuals to preserve their riches. A majority of large companies, which dropped an average of 30% in March, recovered in mere months. If you had bought them at their bottom, you would have earned an approximate 50% return on your capital, which knocks the lousy interest rate returns out of the park. As Warren Buffet has famously boasted, the higher a stock’s price is, the higher the risk, and vice versa. Low stock prices tend to excite savvy investors while scaring newer, more emotional investors.
- Tech Innovation
While GDP is heavily consumer driven, the S&P is held together primarily by capital investment, which has been greatly supporting by tech spending. Tech companies, partially thanks to the naturally growing popularity of online communication, ecommerce, and at-home entertainment, continued to dominate the market as the economy suffered.
Many aspects of Americans’ lives changed during distancing and lockdown protocols. Online shopping, food delivery, and over-the-phone healthcare (known as telehealth) have utilized technology to get tasks done from the comfort (and safety) of home.
A big focus from investors, retail and institutional alike, shifted to technology companies that were enabling citizens to work around COVID-19 restrictions. Problem-solving companies that allowed us to adapt to COVID-19 were a big part of what led to several stock market rallies in this time of economic distress.
- The Market’s Mindset
Glass half empty, or half full? As far as the market was concerned, the glass was being launched to the moon.
As we know from early-stage growth companies with enormous valuations, investor mindset is often linked to future optimism. The price you pay for a share in a company, especially in Tech sectors, reflects the expected future value of that stock.
Naturally, the strings of hope that held the market together after the crash at the end of Q1 were woven together by two things. Vaccination and Stimulus.
It seems like every second day, the NYSE newsfeed was regurgitating the same headlines anew. Some variation of the words “Dow Jones and S&P rally as hopes of stimulus look bright.” Many skeptics argue that stimulus was not as effective as the market thought, as citizens needed extra cash to survive, rather than throw their cheque into the market. However thin the promise of stimulus was, the hope of a vaccine coming into play was the more substantial string of optimism, which not only gave the market promise, but the economy too.
Stocks like Moderna ($MRNA) have soared 410% to date since the March crash. Other companies focused on COVID testing saw big rallies. Even dry ice companies saw some great returns when the Pfizer and Moderna vaccines were announced ready, provided they travel at a subzero temperature. Companies with a medical mandate could see unheard of bull runs overnight with any whisper of positive FDA approvals or vaccine rumors. For many reasons, many analysts say that 2020 was one of the easiest years to make
Will the Economy Catch Up to the Market?
Many bears still predict the market is in a bubble, while others suggest these technology–driven gains are part of its growth and adaptation. Either way, any bull run is normally met with some kind of pullback; some drastic, some mild.
Although retail sales are improving, unemployment rates are still high, as that’s a lagging factor in the recovery from COVID-19. The market may have been graciously saved (at least for now), but as for the economy, it’s going to take a little more work.
There are signs that stimulus spending could continue well past the economic recovery, allowing the market to continue its bullish growth without too heavy a stumble. Notoriously pro-stimulus economist, Janet Yellen, is all-but approved to join the Biden administration as U.S. Treasury Secretary, which spells out good things for individual bank accounts – you can read our article on her here to learn more.
Thanks to the deployment of vaccines, lockdowns and other economy-strangling restrictions should soon see the light at the end of the tunnel. That, along with Biden’s plans of financial support, give citizens and investors alike a hope that, instead of seeing the market crash down to match the economy, it’s hopeful that the economy will, instead, catch up to the market over time.
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