July 2, 2020
But investor optimism is becoming harder to sustain
Of all the outcomes that might accompany a global pandemic, a historic stockmarket boom seems among the least likely. And yet on June 30th the S&P 500, America's main index, ended the second quarter up by 20% on its March 31st close, its strongest quarterly performance in more than two decades. The rally has puzzled investors. Since March 23rd, the market has soared by 39%, even as the country’s official covid-19 death toll has climbed to more than 127,000. It is now just 8% below its historic peak. Why?
These gains can be attributed in large part to unprecedented government action. A $2trn emergency spending package, passed by Congress in March, sent $1,200-worth of stimulus cheques to most Americans, lent hundreds of billions to ailing firms, and increased unemployment benefits for laid-off workers. The Federal Reserve, meanwhile, has expanded its balance sheet by more than $2.8trn, much of which has been used to buy Treasuries and mortgage-backed securities. Trillions more in emergency business loans are on their way. The flood of money has pushed down interest rates, prompting investors to seek better returns in the stockmarket. Even those sceptical of the rally are joining in, if only to avoid missing out, a phenomenon dubbed the “FOMO trade”.
But fundamentals still look poor. Some 20m Americans are out of work. A coronavirus vaccine is still months, if not years, away. And the pandemic is already forecast to shrink the American economy by $8trn, or 3%, over the next decade, according to the Congressional Budget Office. A sharp drop in corporate earnings has made shares look very expensive: shares in the companies that make up the S&P 500 are now trading at about 21 times their expected earnings over the next 12 months, a level not seen since the early 2000s. Earnings are not expected to return to 2019 levels until late next year.
Prospects for a swift recovery look bleak. States are reversing their reopening plans, closing bars, restaurants and other businesses amid spikes in new coronavirus cases. If the outbreak does not slow soon, even Wall Street’s bulls may start having qualms.