Businesses Closed, Millions Were Left Unemployed… So Why Did Stocks Rally?
“…Are we in a bubble?”
Many investors and general followers of the stock markets have been left somewhat concerned about the future of the current markets.
We’ve seen nothing but bullish rallies and increased growth since the initial pullback caused by the shock of the pandemic. Investors have since poured billions into the stock market and now there’s sentiment in the air that this all seems too good to be true.
Is everything about to come crashing down?
Over a year ago, the idea that we’d be living through a global pandemic that caused thousands of businesses to close, millions of people to be made unemployed and most of the world to be restricted by lockdowns seems pretty insane.
But whilst it’s been a hectic year filled with many twists, turns and downfalls for us, the stock market has consistently soared since March.
How is it that the stock market is growing while the economy is in turmoil? How can it really be possible that unemployment has been at an all time high, businesses all around the world have been forced to close, people are locked inside their homes and spending way less money, and yet the stock market is still growing rapidly?
It’s actually not as weird as you might think.
To make things seem clearer, we need to ask the right questions. If 49 million Americans filed claims for unemployment benefits, then what’s driving the growth in capital within the markets and where is it coming from? Where is all this money coming from if everyone’s losing jobs and the economy has shrunk?
It might be easy to draw the line that only wealthy, high-net worth investors and governments have simply capitalised on an opportunity to invest into the markets since the initial fall in March.
But why would investors pour their money into the markets while businesses all over the world have closed down or been put on hold?
The Tech Titans
The global pandemic has acted like a catalyst in our inevitable surge towards automation and widespread use of technology. Thanks to companies like Zoom, Alphabet, Microsoft and Apple; we’ve seemingly maintained a significant level of productivity among white collar industries which has paved the way for a ‘new normal’ that is likely to remain even after the pandemic is all over.
You no longer need to be present at an office, nor do you need to fly around the world to attend meetings and conferences. Despite the overall state of the economy, these key facts have encouraged investors to pour billions into the very best global tech companies and these have played a major role in carrying Index Funds all over the globe into extremely bullish territories.
The top 5 tech stocks have made up more than 20% of the overall market value of the S&P 500.
However, although this answers our question to why investors have continued to pour billions into the stock markets, it still doesn’t tell us where all this money is coming from.
Quantitative Easing
Quantitative Easing is the policy used by both governments and central banks which is put in place to stimulate the economy.
When the economy slows like it has this year, central banks begin printing more money with which they then purchase fixed-interest securities like government bonds. This new supply of money ultimately lowers the cost of money, the same way an increase in the supply of any product ultimately decreases demand and therefore affects the value of the product.
This is why you’re receiving 0% interest rates in your bank accounts today.
Due to the increased supply of money within the economy, banks no longer wish to/need to offer you attractive interest rates to encourage you to deposit money in your accounts.
Without getting too technical, this Quantitative Easing Policy and the Government’s Fiscal Stimulus policy, like the US Stimulus Checks and the UK Government’s Furlough; is what’s causing this new flow of cash to reach the stock markets.
After all, there’s more cash in the economy which is finding it’s way into the hands of normal people all around the world, and they’re not getting any growth incentives from the banks to store their cash in their accounts anymore. Therefore, these policies are designed to discourage saving and increase spending among individuals and businesses.
However, for those who still want to save and grow their money effectively; where else is there to put it but invest it into the stock market? After all, it’s counter productive to deposit funds into fixed-interest investments and bank accounts that are seeing interest rates lower than the 2% rate of inflation.
What Does This Mean for the Future?
For those who are still in the accumulation phase of their financial journey to passive income and retirement, you’ll find it very difficult to see any growth on your investments if you plan to leave your cash in the bank or other low-interest environments.
Given the current state of the economy, low interest rates aren’t expected to return to moderate levels for quite some time. Unfortunately for us, central banks and governments need to encourage spending over a long period of time in order to stimulate the economy to a sustainable level — so the incentive to keep interest rates at 0% will remain the same.
It’s expected that we won’t see interest rates above 1% for the next five years.
This means that for the next five years, it’s likely that we’ll see even more stock market growth, as there’s a larger incentive for investors to keep their money away from low-interest environments and bank accounts.
But that’s not the only reason we’re expecting more growth.
The US elections played a large part in any of the uncertainty that persisted throughout the markets in the recent months.
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While it’s no secret that Donald Trump can prove to be somewhat unpredictable at times, many feared the repercussions of either of a Republican defeat or victory leading up to the election results — which became evermore rational after his defeat when he threatened to take the matter to court.
Republican or Democrat, this causes uncertainty for our economy and causes even more volatility throughout stock markets all over the globe.
The US Dollar represents 25% of the whole global economy.
Now that Joe Biden has been elected as President of the US and Donald Trump has seemingly began to accept his defeat, any volatility caused by the US elections has begun to cease.
With this uncertainty being factored out of the equation, and while we’re expecting to be living under Democratic Policies very soon, we’re likely to see investors feel more comfortable investing into the growth of the markets.
Contradictory to popular notion, stock markets historically perform better under Democratic Presidencies.
This however, has nothing to do with either of the Party Policies, but more to do with the timing of when Democrats are elected into office.
Historically, Democratic Parties are elected into office during times of social unrest and economic uncertainty. Voters tend to feel more confident in Democratic Policies which are more Socialist-leaning when they feel less confident taking individual risks.
This is another key indicator for expected growth among many investors who recognise the cyclical nature of our economy and are in understanding of our current non-interest bearing environment.
The final hurdle for growth is ultimately the pandemic.
We’ve had recent news of promising progress with multiple vaccines; particularly the Pfizer Vaccine, in which research has suggested that it’s been more than 90% effective in trials.
The CEO of Pfizer, Albert Bourla, announced that if the Vaccine was to receive an Emergency Use Authorization from the FDA, they could have 50 million vaccine doses available by the end of the year, and 1.3 billion available by the end of next year.
This news had already caused a massive reaction in the markets earlier last month when stock markets began to see investors offloading shares in tech companies like Zoom and Netflix and began buying shares in Delta Airlines and other travel companies.
This is a subtle indication of how we can expect the markets to react if and when a vaccine is approved by the FDA. As of today, the UK have officially approved the Pfizer Vaccine and it’s due to roll out in the coming weeks.
This will dramatically change the foundations for opportunity and growth in a number of different sectors.
Our ‘New Normal’
With the expectation that the development and distribution of a safe vaccine will be available globally in the next year (or even sooner) — it’s quite likely that we will see many elements of life return to the normal we once knew.
People will return to work, restaurants and bars will remain open till the late night again; social events, music festivals and worldwide travel will be a thing of the norm once again.
But what’s here to stay?
After already dominating the markets for over a decade, we know that technology has had more of an influence on how we’ve lived our lives during the lockdown than any other sector.
Given the advancements in the industry and the billions that’s been invested into companies like Amazon, Microsoft and Alphabet over the term of the pandemic; we can be sure that our increasing reliance on tech and the impact that it has on the way we live our daily lives means it’s definitely here to stay.
In a recent poll carried out by our team, we found that 42% of voters believe Sustainable Energy will be the dominating sector over the next 10 years:
Sustainable Energy and Technology will likely be the driving force for the future markets; and given the circumstances of the current economic landscape and our low-interest environment, you can expect investors to continue to be long on the markets throughout 2021.
Final Thoughts:
The stock market doesn’t always reflect the state of the current economy despite the two heavily correlating with each other during less volatile periods of time. It’s important to remember that the stock market is a projection of how we believe the landscape our economy is going to look in the future with the resources we collectively have today.
This is why technology stocks continued to grow so much over the space of the pandemic whereas the travel industry was hit pretty hard in every way. When things begin to move at a faster pace again, we’ll likely see a lot more growth in sectors that were put on hold during the pandemic while also seeing the markets advance in different directions as new companies and existing companies try to adapt to the new world.
As of today, 2/12/2020, the UK have officially approved the Pfizer Vaccine and it’s due to be rolled out in the coming weeks.
Let’s see how this affects our markets.
What are your thoughts on the current markets? Do you think we’ll see more growth in 2021? And what sectors interest you most as an investor?
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*** This article is for informational purposes only. ***
