In the last week stocks have done well. What is the reason for it? And is this going to be a long rally from here? Or just a bounce?
Reason for the upticks
Say the economy would be a patient. Let’s say the patient would get very ill, for example getting cancer or Alzheimer. Stock markets do not like uncertainty and would panic very hard while the patient (read:economy) is very ill and the future path is very uncertain. Then at some point the patient dies (read: recession is there). This would be the worst-case scenario. But somehow, the market does get the certainty of the state of the patient (economy) and can start looking forward again.
For diseases like Covid-19, the day that the most people get infected is probably close to the low of the markets. Currently, the amount of new infections has been stabilizing worldwide and gives the markets some freedom to start looking again ahead of the disease. This is a bit what is happening now. Markets start focusing again on signals that economies/countries might start partly reopening again in the upcoming weeks/months. For example, in the US they are currently assessing if they can start sport events without public in May or June.
Long rally from here?
That is not per se a likely scenario, it is one of the possible scenarios. It could also easily be a bounce that we are experiencing now. After which the markets decline again. It is all depending on:
- How long does it take to get the Covid-19 completely under control?
- The trade off that countries make between saving lives and saving the economy?
- At what stage do they (partly) re-open the country again?
- Do they come with extra stimulus every week? Or do they have to let a lot of companies go bankrupt?
- Do some politicians think more about their elections and try to save every single life instead of doing what’s best for the country as a whole?
- How severe the recession will be and how well the financial system can cope with that.
The recession still has to come and economical figures in the upcoming months will give indications how severe and long the recession will take. The current situation is very exceptional and no-one or only few people do have a good idea how the economical landscape will look like in a few months and years.
Every crisis brings long-term benefits
People and countries learn from difficult times. It is easy to live in a world when things are going well, but when things are difficult people do need to get creative. A lot of people in a lot of jobs are currently finding out that working remotely from home is not that bad and can actually work very well. I expect that in the future, lots of more people and companies will offer people to work from home more and more compared to the situation before Covid-19. This can have enormous benefits. Less hours do get lost in travel (less traffic jams), people working more efficiently and last but not least the environment benefits as well.