How can investors make sense of the apparent disconnect between stock market performance and economic indicators?
Do you find it puzzling when a bleak economic report emerges from the press, only to be accompanied by a positive surge in the stock market? You’re not alone. The last few weeks have produced many examples of a stark contrast between stock market performance and economic indicators. So why the apparent disconnect?
Markets are forward-looking, meaning current asset prices reflect market participants’ aggregate expectations. Those expectations include whatever future economic developments are anticipated and their potential impact on cash flows, which are key to a stock’s value. For example, if the market expects the economic environment to weaken company cash flows, stock markets may react well in advance of when we observe the impact on cash flows, as expectations are embedded in prices. And the eventual direction of the stock market will depend on how the economic outcome compares to expectations. If things aren’t as bad as expected, poor economic news can be greeted with a positive stock reaction.
When markets turn volatile and uncertainty rises, it’s common for investors to flock to what they perceive to be safer assets. Despite well-documented perils to such market-timing maneuvers, it can be tough to overcome the urge to get out of the market and wait on the sidelines until markets return to “normal.” (Professor Amit Goyal discusses the potential shortcomings of market-timing strategies here).
Flows into money market funds indicate many investors have again flown the coop since the current market downturn began in late February. Government money market funds (MMFs) are a popular destination for investors seeking a “safe” port, andFigure 1shows that more than $1 trillion has poured into the category since February 19. By way of comparison, government MMFs experienced year-to-date net outflows of more than $30 billion before the downturn. While we don’t know exactly where the money came from, we believe it’s safe to assume that a significant portion came from equities.
As the threat of COVID-19 keeps millions of Americans locked down at home, businesses and financial markets are suffering.
For example, a survey of small-business owners found that 51% did not believe they could survive the pandemic for longer than three months. At the same time, the S&P 500 posted its worst first-quarter on record.
In response to this havoc, the U.S. Federal Reserve (the Fed) is taking unprecedented steps to try and stabilize the economy. This includes a return to quantitative easing (QE), a controversial policy which involves adding more money into the banking system. To help us understand the implications of these actions, today’s chart illustrates the swelling balance sheet of the Fed.
Sadly, as is the case in any crisis, there are those among us who are looking to capitalize on cruelty and take advantage of heightened vulnerabilities. Hackers are trying to lure victims to click on COVID-19 related hyperlinks that contain malicious software and other computer viruses. In some cases, these scams look like official messages from the government and they send people to fake websites where their sensitive information can be stolen.
The following guidelines can help you protect yourself from these digital scams and stay clear of suspicious links you may come across in your internet travels.
On March 27 the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to address the unprecedented public health and economic crisis related to COVID-19.
This $2 trillion bill is meant to impact both individuals and businesses and contains significant tax-savings measures. It could affect prior tax years while also creating immediate cash-flow.
With the UK going into a total self-imposed quarantine, several large American cities in lockdown, and distressing scenes coming out of Spain and Italy, life right now feels chaotic and insecure. It's a crisis. The economy has ground to a halt.
These are the worst of times.
And yet, there is hope. This is temporary. It will end. Already, there are reasons to be optimistic.
This article originally appeared on VisualCapitalist.com. View the original article here.
With all eyes on the COVID-19 pandemic and how its impact will be felt over the coming weeks and months, people are being bombarded with all kinds of noise and speculation.
Between a deadly virus, looming economic effects, and numerous government shutdowns, it’s clear that a fertile breeding ground has been created for misinformation, rumors, conspiracy theories, hot takes, and other potentially misleading content.
We are facing something we have never faced before in our lifetimes. That is a fact and, in a time, when the news of the pandemic spreading and the recommendations on social distancing getting broader by the day, it can be hard to feel certain or safe about anything.
As troubling as it is to watch the unprecedented market decline, we need to maintain our health and the health and safety of our family, friends, and neighbors as the number one priority. COVID-19 which emerged late in 2019 in China has spread rapidly worldwide since then and is a global pandemic. The measures taken by leaders around the globe have been strong leaving most children without a classroom to go to, parents working from home or without a job altogether and investors panicking about what is to come.
This disruption to daily life and our psyches is substantial and it’s terrible. The coming weeks will not be easy, but these measures are practical and prudent.
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