While the world continues to struggle with the coronavirus and governments try to balance public health with reopening the economy, there’s one thing seems to have gotten over Covid 19…the stock market.
Profits for the first quarter of January through to March have all been announced. This period included a strong period of growth and the start of the coronavirus pandemic. We saw profits of S&P 500 companies fell by 13% in Q1. Banks all underperformed expectations while discretionary spending companies were absolutely hammered. Profits in Marriott International fell by 92%. Even Amazon’s profits fell as the cost of keeping open during the pandemic increased.
Analysts think things will get worse and are bracing themselves for Quarter 2 results that will be out in July, which will show profits for an entire quarter in lockdown. A lot of companies have stopped given forecasts for the rest of 2020 because they don’t want to spook their shareholders.
Analysts think profits will tumble by 20% in 2020 and dividends are being cut by a lot of companies. Traditionally, stock prices are set by future expected profits and dividends.
But as I write this, the S&P 500 and MSCI World Index are just 11.5% and 13.9% respectively off their highs in mid February this year. Both fell by -33% in just one month and the S&P 500 has grown by 34% since and the MSCI World Index has grown by 30%. Last week Facebook hit its highest ever share price. All of this is going on in the middle of a pandemic.
One explanation I read was that people are simply seeing this as a great buying opportunity. Lots of people didn’t benefit from the surge in stock prices after the Credit Crunch and want a piece of the action now. With access to trading platforms easier than ever before, people are opening new accounts and trading, sometimes out of boredom. But as most of these accounts are small, there needs to be a huge amount of trading to have the same impact as a large institutional investor. Warren Bufett held $4 billion in US airlines for example.
There is another explanation that seems to make more sense: Central Banks. Central Banks around the world have embarked on a massive bond buying programme to provide cheap credit to governments and have entered the market of buying corporate bonds as well. This means that companies can borrow cheaply to maintain cashflow. It has also pushed bond yields downwards, with the consequence of people staying in equities to get a return. So while profits are falling, the work of Central Banks printing money is keeping share prices high.
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