While the global economic crisis is plunging us into a deep recession and unemployment figures are reaching recordhighs, the stock markets are showing a remarkable recovery.
Why have prices risen again after the dramatic fall in March? Especially at a time when we are only just beginning to grasp the full force of the negative consequences of the pandemic. Have investors gone mad, or is the market always right?
You may not see the logic either, so below we have listed ten reasons why investors are investing:
Buy the dip
Optimism is an important feature of many investors. And despite the hard-hitting corona crisis, many of them believe – and continue to believe – in good returns. Not only in the long term, but also in the short term. They think it is the perfect time to get in cheaply or buy at a discount.
Search for yield
The corona crisis has not changed the extremely low interest rates. On the contrary, the pressure on interest rates and the expectation that the historically low rates will remain for a long time has only increased.
The ECB, Federal Reserve and other central banks have seized the crisis for a new and unprecedented wave of monetary easing, together with bond and corporate bond buying programs. This creates an enormous influx of new money, which – like in recent years – again largely flows into the financial markets.
The European Commission and governments of affected countries are also spending extra trillions to mitigate and prevent the dramatic effects on the economy. Many have declared “whatever it takes”. Although they themselves are too deep in debt for this, it ensures that the economic damage is dampened and substantial extra investments are made, for example, in the healthcare sector.
Tech, tech, tech
Not only is the medical sector popular with investors, but big tech in particular doesn’t appear to have been affectedby the global crisis. Companies such as Alphabet, Amazon, Apple, Facebook and Microsoft are even seen as big winners. The fact that these so-called FAAAM companies now account for more than 20% of the S & P-500 in terms of weight and that tech also dominates the Nasdaq-100 explains these recently gained indices.
China and emerging markets
Europe and the US are hit hard and have many corona deaths, but large parts of the world are much less affected by the corona pandemic. For the time being, the impact in Africa and Asia has been much lower, and has subsequentlydone less harm to emerging markets. China has also scrambled to its feet in no time. Ultimately, this could also help accelerate the emergence of Western economies in the crisis.
The current very low prices of energy and other raw materials certainly also help. Although countries (including Russia) and companies (including Shell) are hit by this, it is a godsend for other affected sectors. Low energy prices can also pull the rest of the economy out of the crisis faster and more economically.
Hope for a vaccine
And we could, of course, almost forget the cause of the crisis itself. The coronavirus. Despite the devastating effect on the economy and businesses, there is hope that the virus will be curbed. That we can live with it and that we can control it with a vaccine. A vaccine will come, the only question is when. A large group of investors are already speculating on this good news, which will undoubtedly give markets a boost.
But looking to the future is not just about corona. Investors with a longer term horizon will not be swayed by the current crisis. They look at historical figures and are convinced that equity investments will soon return to positive returns. That beautiful corporate profits and dividends will soon be normal again. They do not turn away from the market, but continue to invest – even now.
And then there is the group of investors who saw the stock market fall, but now see it rise again quickly. And they are increasingly afraid that they will miss the ride up if they do not board in time: The Fear of Missing Out (FOMO). They do not know whether what happens is really fundamental, but it does not matter. They want to avoid the risk of missing the ride up. So they invest.
Of course there is also a lot to say negatively about the current situation. It is therefore up to you to determine whether the above arguments are justifiably optimistic.The fact is that they have clearly moved the markets up again in the past month.
Perhaps you are already investing heavily again, or you are deliberately keeping an appropriate distance from the stock exchange. Wherever we end up on the 31st of December, one thing is certain: Year 2020 will go into the history books anyway.
Investing is risky, your investment may be worth less.
The information in this article is not intended as individual investment advice or as an individual recommendation to make certain investments. Kaspar Huijsman’s remuneration is / was not / will not be directly or indirectly related to his specific recommendations or positions. Although BinckBank uses reliable sources, BinckBank cannot guarantee that the information is accurate, complete and up-to-date. Any information used from this article without prior verification or advice, is at your own risk. We advise that you only invest in products that fit your knowledge and experience and do not invest in financial instruments where you do not understand the risks.