Why have markets kept rising since late March despite COVID-19 worsening?
For five weeks between mid February and late March global equity markets plunged. But ever since they have been on the way up despite the COVID-19 pandemic worsening during that time.
On March 23, the world had approximately 350,000 cases and 15,000 deaths. Now it has 6.5 million and casualties are approaching 350,000.
Hundreds of millions more have had their lives changed to an extent unprecedented since World War Two. Lockdowns impeded people’s daily activities and entire industries went into hibernation.
Yet it appears equity markets have disregarded all of this judging by their rise since then. The ASX has gained over 30 per cent in that time; while still below its February peak it has recovered more than half the ground lost.
Is this a case of investor ignorance or is there now more certainty than there was in March?
Morningstar analyst Adam Fleck believes it is the latter.
“I think the market is starting to gain confidence, maybe starting to look through to the long run and global economic impact that [COVID-19] is potentially going to have,” he told Stockhead.
“You’ve got Gilead with their Remdesivir drug starting to show some signs it could be helpful for treatment.
“A lot of countries were rapid with their reactions, but with a lot of countries flattening of their curves, starting to deal with some of their challenges a little better – to varying degrees of course.”
Fleck believes the crash was an over-reaction yet thinks the recovery is justified for now, since many stocks fell below value.
Nevertheless, he thinks another crash is not impossible particularly if promising vaccine and treatment options don’t eventuate.
“We thought the market probably over-reacted in a lot of ways,” he said.
“For us us it went from overvalued markets, particularly in Australia and the US, down to quite undervalued markets.
“Now you’ve clawed back [losses] and are looking at roughly around fair value. We think particularly Australia is trading at fair value and the US is not dissimilar.
“The market is saying it will have a short-term impact but we’re getting options and vaccines are progressing.”
Fleck said if the pandemic could be restricted to a multi-quarter rather than a multi-year event, the long-run impact to global GDP and the economics of the world would likely be relatively contained.
“There is a risk though,” he warned.
“If you see another wave come through in the North American autumn that overwhelms what people are expecting, or some of these vaccine trials don’t work out or treatments are not viable, I think there’s definitely risk.”