Will 2021 Stage A Market Boom Post C Bottom?

  • May 10, 2020 AEST
  • Team Kalkine
Will 2021 Stage A Market Boom Post C Bottom?

Global economy is currently experiencing a severe downturn, as countries seek to contain the novel coronavirus. But will next year see the beginning of one of the strongest runs for the global economy ever?

The iconic Eiffel Tower in Paris saw few tourists in early 2020 and remains closed to date, while the Leaning Tower of Pisa in Italy missed people posing in front of it like they typically do! The world awaits a COVID-19-free surrounding once more and is eager to shirk the shackles of restrictions currently imposed.

Besides taking a toll on health and social lives, novel coronavirus, or the Invisible Enemy of this new decade as some might deem it to be, has caused dire ramifications on businesses and trade. While manufacturing came to a standstill owing to stay-at-home orders, quarantines overpowered international business. Consequently, stock exchanges across the world experienced bear sentiments and sell offs at record levels, reminding one of the nervousness that prevailed not too long ago during the Great Financial Crisis (GFC).

Stock Market Stance 2020- GFC Version 2?

Appalling economic data, plunging oil prices and grim corporate results were consequences of the rapid spread of COVID-19 across every continent. The coronavirus outbreak wreaked havoc on global financial markets so deep that some are comparing its impact to the 2008 recession.

The 2008 recession (a direct result of the GFC) was sparked by collapse of the subprime mortgage market in the US, which gradually became a contagion that spread to banks across the world and led to a global economic downturn. In 2020, history seems to have repeated itself with equity markets facing a shock to the system, only this time the contagion is a virus, which has no cure to date.

Turning to the stock market stance in both the years under discussion, S&P 500 Index fell by ~37% in 2008. In year-to-date period to 8 May 2020, S&P 500 had declined by 9.32%, leading investors to plan for situations more serious than a recession.

As deciphered, the stock market has reacted to the impacts of novel coronavirus disease with fretting volatility, owing to investors selling out of fear.

COVID-19 Silver Linings

As they rightly say, change is the only constant. The sinusoidal trend of global market charts has not been amiable to the red zone exclusively amid the pandemic environment. Owing to government-led economic relief plans, stimulus packages, vaccines in pre-clinical and clinical trials and adherence to the much-needed lockdown situation, markets have shown signs of recovery, though at modest levels.

Let us look at the silver linings that have propelled major stock market indexes to recover post the 30%+ drop in late-March 2020:

Spending & Liquidity Trends  

Taking example of the US, money sent into the economy, buying of bonds and other instruments aided in offsetting some of the missing funds flowing through the economy, and stabilised the financial system.

The Fed’s economic relief plans caused a significant portion of confidence investors had in stocks and they ended up buying money market instruments, government bonds, and mortgage bonds, with the intent to provide liquidity and keep rates low.

Market Darlings Kept Momentum in Good Swing  

Big firms are expected to be healthy enough to survive and possibly thrive in any volatile aftermath. Large companies truly shone this year. For instance, the FAANG stocks garnered much attention in the period due to their saviour offerings amid the market turmoil.

Low-Interest Rates and Valuation

Lower the prevailing interest rates, more investors are willing to pay. COVID-19 propelled central banks to keep interest rates artificially low on a relative and absolute basis in an effort to maintain a financing environment to promote recovery and economic growth for individuals and businesses. What’s interesting is the market consensus believing that these rates, which help in making other stock valuations, are projected to stay low for the foreseeable future.

Government Moves- Stimulus Packages & Stay-at-Home Orders

Stimulus packages injected across economies have not just helped businesses, banks, lenders and traders, but have also given confidence to investors that money will possibly be back in the market, once businesses use stimulus packages to restart work. Indirectly, the stock market has also benefitted from stay-at-home orders and likewise quarantine measures that are supposedly the biggest contributor in curbing the spread of the coronavirus and regulating business work.

GOOD READ- Is stimulus package really beneficial, or is it just delaying the inevitable?

Will 2021 Stage A Market Boom?

The hottest question of the current times has not definite answer just yet. However, optimism is what is doing rounds amid market participants at the back of the silver linings (discussed above) that have slowly begun to dominate the share market.

The market does seem to be anticipating a recovery, as it is already looking at 2021 with some experts opining that the rebound has the potential to be faster than would be the case in other recessionary scenarios. This is likely to be majorly catalysed by monetary and fiscal stimulus being pumped into economies around the world that can propel both the global economy and equities to make a comeback.

Government approach and productivity enhancing reforms can possibly stem financial losses rather than continuing to over-rely on central banks, which will in turn help economies recover.

Recession fears too are overblown despite the latest selloffs, as global markets have had the history to bounce back in the long-term. This is because the dramatic market volatility of the COVID-19 phase presents a great opportunity for stock-picking outside of big companies as valuations become cheaper.

With coronavirus continuing to roil markets and undermine economic growth, panic is likely. But history repeats itself and, in this context, it proves that market recovery occurs in time at the back of required support. This is therefore not a time to give up, rather speculate, gauge, and await all that is in store.

GOOD READ- How will the ASX look post COVID-19

 


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