For those who have been keeping track of the economy
and the stock market, I'm sure you would have noticed something very weird has
been happening. So, on the one hand, you look at the stock market. You would
think we are in the most productive stage possible over the last two months the stock market is up by 35% .however when you look at the economy how much
businesses are actually producing that is down in the 1st quarter of 2020, the economy
has shrunk by 4.8%, and in the 2nd quarter, it's predicted to shrink by a
further 30%.so it's very weird times that we're in the stock market the way
people priced businesses are up massively but those businesses are producing
less and not just a little bit less a whole lot less compared to last year and
other previous years.
Why is this contradictory behavior happening?
First, we need to look at the economy as to what has
happened here, and I'm sure you guys already know the main reason why the economy
is down COVID -19, lockdown, stay home because of this lockdown everyone
staying at home and business has been shut. It had a dramatic effect on the
economy until 2019 GDP was growing at a steady rate. 2020 comes with something
that no one could have ever predicted occurred a virus swept throughout the
world, causing governments to take extreme action citizens were forced to stay
at home, the business had to shut, and the economy halted in its tracks. This
is what known as Black Swan events.
Now because
people weren't buying as much and businesses were shut, nothing was getting
produced. Hence, GDP went down dramatically, as I mentioned earlier it's down
4.8% in the 1st quarter of 2020 for the USA this number expected to be negative
30% in the 2nd quarter of this year. Still, it's not just the USA that's been
affected, China, Germany, Italy, UK, etc. the virus has impacted most
countries.
The USA's
economy is down, and people have lost jobs due to this weak economy.as you can
see, the unemployment claims were reasonable at the start of this year. Then at
the end of March-April spike, the benefit claims shot up almost 7 million marks
in 1 week. As I say, unemployment is now sitting at 14.7%, up from just 3.5% at
the start of this year. So, I think it's fair to say that economically we're
all battling.
The second part is the stock market, the stock
market after its initial dip is now up over 35% the S&P 500 has climbed
almost 800 points starting to come close to the all-time highs at 3036points.
The Dow Jones up nearly 7,000 points to a total of 25,500 and USA's primary
index the Russell 2000 is also up by over 400points over the last two months,
but what we need to answer is why is the stock market up while the economy is
falling?
The first thing that we all need to realize is the
stock market is investors predicting. What will be to come so, if the stock
market is up, that means investors believe that the economy and the businesses
behind the economy will do well. If the stock market is down its vice versa, it
means investors are not happy to own companies' stocks, and they predict that
things will worsen. Now, as you can see, the stock market reacts before the
economy does. So in the 2008 recession, the stock market dropped before the
economy did, it started going down around October 2007.
In contrast, the economy collapsed in 2008. the
stock market is investors predicting what will be to come. Hence, the stock
market is up over the past two months because investors are bullish on America
and businesses in America.
Investors think that things are going to get better
now,
why have
investors been so bullish recently?
A couple of
key reasons, I want to point out:
The first thing that's happening is states are reopening all 50 states that have started
opening to various degrees, and this means businesses finally can at least
start the process to try to get things back to normal. To employ the workers
again begin to produce again and serve customers and obviously at some point in
time this will help contribute to GDP, the question is how quickly no one knows
for sure that investors seem to be bullish.
Secondly, there are hopes that our vaccine may be
produced. There has been news of a potential vaccine for the virus by year-end
or early 2021. you know there's a lot of competition amongst biopharmaceutical
companies to find a vaccine, which gives investors hope.
Another motive contributing to the stock market rise
is that some of the big names are bullish. For example, the USA's president is
bullish on the stock market, and he's trying to reopen the economy as quickly
as possible. Trump made a recent tweet sane stock market up a big Dell crosses
25,000 and S&P 500 over 3,000. States should open up As soon as possible
the transition to greatness has started ahead of schedule there will be ups and
downs but next year will be one of the best that's one example of a big player
that's bullish. Elon Musk saying let us get back on with business, I don't know
if any of you have listened to the Joe Rogan that he did, but it's pretty clear
that he wants to get his businesses rolling again. He recently reopened his
Tesla factory in Fremont, California. Not long ago, it seems to be the
consensus at least among the prominent business guys that they want to get on
with business and try and save this economy.
The last
thing I need to mention is the FED (Federal Reserve System), and it seems that
the Fed is doing everything in its power to try and stimulate the economy
interest rates have now been put to close to all-time lows at 0.25%. This way,
people can borrow money for cheaper and use that money to buy things or start a
business. Mostly these result companies producing more, GDP goes up, and so
does the economy. That's the reasoning behind lowering interest rates. I also
need to mention the two trillion dollar stimulus package. This package was
introduced to support the US economy and the workers through these tough times.
This is a lot of money going towards bolstering up the economy. So there are a
lot of positive factors that are at play to try and combat this negative
economic effect that we have seen from the lockdown.
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