What’s Going On Here?The US stock market’s key index, the S&P 500, rose above the level at which it started 2020 this week – and it’s only about 5% away from February’s record high (tweet this). What Does This Mean?Ever since the dramatic stock market selloff in March, investors have been encouraged by promises from major central banks and governments that they’d do whatever they could to shield companies and workers from the coronavirus pandemic. And more recently, those investors have been further emboldened by business reopenings – so much so they’ve been buying up stocks in their droves.
But not everyone feels the same way: others think stock markets are now “priced for perfection”, and that unexpected bad news – like job losses or business insolvencies – could derail the market’s recovery. That fear’s likely been compounded by this recovery's dependence on big tech companies, which have helped the US’s tech-focused index – the Nasdaq Composite – rise 40% from its March lows to a record high this week. Why Should I Care?The bigger picture: The stock market isn’t the economy.
Stock markets reflect what’s expected to happen in the economy before it actually does – and even then, they're a better reflection of that economy’s biggest companies than the economy as a whole. That was driven home by the World Bank earlier this week, which now predicts the coronavirus-tanked global economy will shrink by 5.2% this year – the most since World War II, and an outcome that’ll force millions into poverty.
For markets: Put your money where your mouth is.
Some investors – like hedge funds – have positioned their investments so that if markets fall again, any losses will partly be offset by other assets using “put options”. Puts give an investor the right to sell shares at a predetermined price, meaning they’ll be able to recoup some losses from the fall of the shares themselves. | 