The stock market crashed steeply in the last few weeks. But it has rebounded in the last few days. Is this for real? Why are investors buying stocks again? The following are some possible reasons:
- The infection rates in major cities have relatively tapered (except in the US) and people are buying in anticipation of a recovery
- China has come out of lock-down and businesses are beginning to return to normalcy (assuming there is no 2nd wave of infections)
- Governments have stepped in with bailout packages to stimulate the economies for growth again
- The prices of stocks appear “cheap” relative to just a month ago.
However, I urge caution for two reasons:
1. 195 million workers’ worth of labour have been wiped out in one quarter.
From the most recent global financial crises, recovery of such magnitude takes 1-2 years to return to stability. Any recovery is likely pure speculation unless it is based on a company’s fundamentals. Hence, we should be cautious in assessing the apparent market recovery.
2. While infection rates appear to be tapering off, there is a possibility of a second wave of infections.
It is true that China is slowly returning to normalcy. But they are doing it very cautiously because no one wants to risk a second wave of infections. Many European cities are beginning to come out of lockdown. However, any missteps will result in a second wave of infections which prove to be more costly than the first.
As such, caution is urged in every sense. The most reliable signal of a real recovery would be the discovery of a vaccine or cure for Covid-19. Otherwise, there would be no real recovery. And when would this come? It’ll probably won’t be by June.
Check out the following article which expresses views of whether the current market rally is for real.