Market is bullish due to monetary stimulus
This week has been very successful for the US stock market, and the S&P 500 has gained 12% in just four days. The total rebound performance is even more remarkable since the index gained 27% compared to the lows reached on March 23, 2020.
At this point, the S&P 500 has recovered half of the losses it suffered during the current coronavirus crisis, and has stabilized at June 2019 levels.
The main driver of the current uptrend has been the unprecedented stimulus announced by central banks and governments around the world. The latest news on this front includes the Fed’s $ 2.3 trillion program to help local governments and small and medium-sized businesses, and the EU’s 0.5 trillion euro plan to support economies of the block.
At the same time, the economic news was shocking. In the United States, initial reports on unemployment claims have shown that nearly 17 million Americans have applied for unemployment benefits in just three weeks. This is an unprecedented loss of jobs and, certainly, more are to come.
While the current programs announced by the government will support the short-term unemployed, the key question is how much permanent damage has been caused by the current crisis.
Can the monetary stimulus be unlimited?
Governments and central banks around the world have done a good job of keeping financial markets alive during the acute phase of the crisis. However, there is only so much debt that a country can contract even in an environment of zero interest rates.
With that in mind, it’s hard to expect markets to be supported weekly by additional stimulus news. As a result, they will ultimately find themselves in a situation where they will face negative economic data without such support.
Next week marks the start of the active phase of the earnings season, and the market will listen carefully to what company executives will say during conference calls with investors.
Previously, the US stock market has been able to easily ignore the negative economic data thanks to a huge monetary stimulus and hopes that the virus containment measures will soon be lifted.
However, company assessments will be put to the test with new guidance announcements (in some cases, company executives will refrain from providing guidance).
It remains to be seen whether stocks will be able to gain more ground despite the negative economic news after a spectacular rebound from the lows. At this point, the risk is likely to be biased downward, although speculative activity in the hope of a relentless recovery may further support US stocks.