US equities surge on ‘V-shaped’ recovery predictions
Investors are expecting a quick economic recovery as the NASDAQ 100 hits a new record high and the S&P 500 wipes out the yearly losses.
The benchmark S&P 500 index fell by nearly 34 per cent from peaks in February to the lows in March, moving the markets into bearish territory.
Rising technology and communication stocks have driven gains in the NASDAQ, with companies such as Zoom nearly tripling their share price from early January as lockdown forced consumers into new ways of communicating.
The new bull market was confirmed just 16 weeks after COVID-19 fears saw investors sell down their assets as fears of a US recession loomed.
The NASDAQ has climbed by 44.7 per cent from its 23 March bottom. A bull market is generally considered to be a rise of more than 20 per cent from the low point.
BetaShares chief economist David Bassanese believes markets could be overly optimistic having eclipsed previous highs.
“Ultimately, I suspect markets will be proven to have been overly optimistic in terms of the speed of economic recovery, but markets are ultimately driven by the daily news flow, which has remained generally encouraging since the global lockdowns were put in place,” he said.
“After all, the market had effectively discounted the negative lockdown-related economic data during the sell-off in March, and so was immune to this data when it began to appear over recent months.”
As the economy begins to reopen, the economist argues a clearer picture of the economic outlook will have an impact on the sharemarket.
Mr Bassanese said: “The market has been able to focus on the benefits of the lockdowns in terms of flattening the curve, gradual reopening and now some early signs of a bounce in more recent economic data. But the challenge will come after the initial post reopening bounce in economic data — if subsequent data is a lot more subdued, as I think it will be.
“The market will likely continue to act as if a V-shaped recovery is coming until there is clearer evidence to the contrary.”
A major mover for the market was the monthly jobs report on Friday which showed an unexpected fall in the unemployment rate, bolstering views that the worst of the economic damage from the virus outbreak was over.
Stocks that have previously been hardest hit by the shutdown, including transportation, tourism and the retail industry, have all risen as investors become optimistic about a post-COVID-19-restricted world.
“What is clearly happening is the excitement of reopening is allowing a lot of these companies that have been casualties of COVID-19 to come back and come back in force,” Stanley Druckenmiller, chairman and CEO of the Duquesne Family Office, told CNBC.
However, Mr Bassanese warned Australian investors to be cautious and be patient when investing in the US market.
“I still think it is time for caution, especially if you have yet to buy into the recent equity rally in a major way. The fear of missing out is now intense, but I suspect a decent pullback — of potentially at least half the rally since late March — may unfold in the coming months as the reality of a subdued economic recovery becomes evident,” Mr Bassanese said.
Strong international results have boosted domestic stocks, with the Australian market rising by 2.48 per cent at the time of publication.