Investors trying to find a negative correlation between stock market performance and Covid-19 infections are having a difficult time. There doesn’t seem to be one at the moment and that’s evident in today’s robust rally.
Sentiment remains bullish despite the many question marks around economic prospects over the medium and long term. We may have seen a positive rebound in several releases of economic data over the past couple of weeks, especially the surprising 4.8 million addition in US jobs, but the rise in Covid-19 cases has begun to force a number of US states and some other cities across the globe to either stop their openings or reintroduce new lockdowns. That will certainly threaten any shape of expected economic rebound.
Some may argue that despite the rise in infection cases, the death rate continues to decline and so does the hospitalisation of patients. While this may sound optimistic to some, the virus itself has not become less harmful but it is now infecting younger aged people and will lead to a disaster if the spread gets out of control, especially from those who are asymptomatic. Without a vaccine in place the upturn in economic activity will go through many twists and turns along the road to full recovery.
The stock market is behaving as if all these risks are behind us. China’s blue-chip stocks has jumped more than 5% at the time of writing and US futures are indicating a more than 1% gain at the open. Of course, there are factors contributing to the rally. With an unprecedented amount of cash in the system, equities and high yielding bonds are attracting a lot of interest from investors in the absence of acceptable yield from money markets and longer-term government bonds. That may continue to push risk assets higher, although valuations are approaching extreme levels. To keep this rally alive, we need more intervention from fiscal and monetary policymakers and for investors to believe that policies will be generous enough to provide further liquidity.
However, the more asset prices disconnect from their core fundamentals, the more likely we will see a sharp correction occurring in the future. The earnings season needs to provide some clarity after more than two thirds of companies failed to provide guidance in the first quarter. Without this, analysts’ expectations will diverge further leading to poor decision making from investors. Almost five months into the pandemic, companies should have some projections for revenues and profits. If investors have been forgiving in Q1, they will become more demanding going forward as they can’t remain blindfolded for much longer.
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