It is one of the largest and fastest-growing stock market rallies in memory. In the 12 trading sessions since its March 23 low, the S&P 500 rebounded 25% as component companies increased by more than $ 4.4 trillion in value.
The progress: The tech-rich Nasdaq index is now higher than it was just 6 months ago: if you bought it in early October, you would be making a profit right now.
The plot: Any movement of this magnitude naturally raises the question “why?” I spoke to NYU professor (and my ex-boss) Nouriel Roubini to answer this question and I left with 6 main reasons for the rebound:
- Technical. At the height of the market, many investors had used long positions. They faced huge margin calls when the market fell, which forced them to drain even their safest assets at reduced prices. When the forced sales ended, fears of a major financial crisis dissipated and prices rebounded.
- Epidemiological. The rate of hospitalizations and deaths is no longer increasing exponentially, and in many parts of Europe and the United States appears to have plateaued or even started to decline. The status of New York in particular, although terrible, is not as bad as expected.
- Tax. Thousands of billions of dollars of government money are flooding the world’s economies, and investors expect a significant chunk of that money to end up in the markets, or at least help support business revenues.
- Monetary. The Fed is injecting unprecedented liquidity into the bond markets, depressing yields and prompting a search for higher returns on the stock market.
- Tactical. Market indices are weighted by capitalization, with the largest companies having the greatest weight. These companies are also generally the companies with the strongest balance sheets – best positioned to weather this storm. If the crisis wipes out their competitors, very large companies could be among the biggest winners of the crisis.
- Fundamental. Some investors are betting on a V-shaped recovery, with corporate profits rapidly rising to pre-crisis levels.
Why is it important: The rise in stock prices does not mean that we have reached the end of the beginning of the crisis. But if the market loses these gains and starts to hit new lows, chances are it will do it slowly rather than dramatically.