over 3 years ago • 3 mins
As soon as the worst of the pandemic looked like it was behind them, investors were quick to bundle back into the stock market. But pragmatism has caught up with optimism, and the uplift that seemed destined to send global stocks into the stratosphere has sputtered to a halt.
You probably don’t need reminding we’re living through a pandemic that’s had us shut indoors for months. But what is worth rehashing is just how much damage coronavirus has done to global economic growth. After all, it was the anticipation that economies and company earnings would shrink that led investors to sell off stocks back in March, leading to the first US bear market in over ten years.
The stock market recovered from that selloff pretty quickly, mind you. In fact, it was the shortest bear market the US has ever experienced. Investors – as they do – looked beyond the immediate economic disruption to future opportunity: namely, to businesses that might benefit from an eventual recovery. That led them to buy up shares in companies that’d be less impacted by – if not benefit from – the pandemic, like tech and healthcare firms.
Investors might’ve made hay while the stock market shone, but cautious analysts warned it could promptly be derailed by any unexpected bad news. And while some hedge funds took notice of the warning, the investors that didn’t were left exposed last week when it emerged that coronavirus cases had started rising again in a few US states – a development that could trigger more infections, renewed lockdowns, and a delayed economic recovery. That might partly be why the International Monetary Fund thinks the bounceback will take longer than it initially thought. Throw in additional warnings from the Federal Reserve, and global stocks’ precipitous drop on Thursday – as well as the key US stock market’s 6% fall – was perhaps inevitable.
Investors who dove feet first into a rising market right before it fell will have had their toes singed by the experience. But investors who practice “dollar-cost averaging” are probably sitting pretty: they regularly invest a set amount, and end up paying the average price for stocks over a period of time rather than on any one day. That means that when prices drop – like last week – they get more bang for their buck. And since stock prices tend to rise in the long run, they end up bagging themselves a profit more often than not.
Analysts who are trying to measure their way out of the pandemic have relied heavily on data. That begins with charts showing the number of coronavirus cases and deaths, and then progresses to data that reveals the trajectory of economic reopenings in China and beyond. Then they pore over survey data that predicts economic growth as it’s happening, and use confirmed economic growth updates and company earnings reports to vindicate their position. But if the base metric – coronavirus cases – ticks up, it’ll have a knock-on effect on everything that comes after: investors, as we saw last week, seem more than prepared to throw the stock market baby out with the bathwater…
The US dollar – once a bastion of strength among currencies – has weakened lately, which might partly be down to the Fed’s decision to slash US interest rates to their lowest ever level, as well as a pickup in volatility that’s impacting both currencies and stocks. Analysts at Goldman Sachs are recommending investors look to Asian countries as currency havens. And Norway. Norway’s good too.
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