Four reasons why share markets can continue to hold up as COVID-19 deepens

The news around the pandemic in past weeks has not been promising. New COVID-19 cases have shown early signs of stabilising over recent days, but it’s too soon to call a downtrend in new cases. The world’s largest economy remains under siege from COVID-19 as the virus begins to take hold in the Midwest and the Great Plains of the US.

Unemployment rates in the US1, the UK2 and Australia3 are likely to reach levels not seen since the Great Depression, and whilst a return to growth before the end of the year isn’t out of the question, it’s far from a certainty.

Yet share markets are still holding at values that belie their dismal context, particularly in the US, where the S&P 500 rallied nearly 5% through July4, and now stands at more than 95% of its pre-COVID-19 level5.

This is an extraordinary outcome under the circumstances, and admittedly helped by the fact that the US market is dominated by tech stocks, which comprise over a quarter of the S&P 500’s market capitalisation. However, the same dynamic can be observed in markets around the world, with valuations seemingly indifferent to the surrounding turmoil.

There are very good reasons for the faith that investors are placing in equities markets – here are four of the most prominent at this point in time:

There’s a good chance of an effective vaccine by the end of the year

A number of promising vaccine candidates are in the final phase of testing6, with a large handful of others hot on their heels. The Oxford7 and Moderna8 vaccines are the furthest advanced and, if successful, could be publicly available by the end of 2020. Major vaccine producers are already manufacturing hundreds of millions of dosesin the hope that they are proven safe and effective in mass testing.

Death rates in the US appear to be falling

Even as new cases continued to skyrocket through southern and south-western states in June and July, death rates in the US have been significantly lower than they were in the early months of the pandemic. There is obviously a lag in recording mortality as opposed to new cases, which is why deaths continues to rise in places like Texas and Florida, but at this stage it appears that as health services learn how to better manage the disease, the severity of the pandemic is waning.

Central banks have gone all out to shield their economies

We’ve never seen global monetary stimulus on this scale – low interest rates, quantitative easing programs, cheap financing for banks – policy-makers are throwing the kitchen sink at the task of keeping their economies moving, and markets are responding with confidence.

There’s no real alternatives

With interest rates at zero or near-zero across the world, share markets are one of the few places where investors can generate reliable returns on their investments at this point in time. As such, the current reduced dividend yields look relatively attractive against record-low bond yields.10 The stimulus cash washing around the world’s economies needs to find a home somewhere, and for the moment investors are willing to overlook short-term systemic issues in favour of the longer term and hopes of a return to normality sometime in the new year.

Source: Written by Diana Mousina, Economist – Strategy & Dynamic Markets, AMP Capital, August 2020.

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