Why Has the Market Been Rallying?

In the midst of the global pandemic, unemployment levels not seen since the Great Depression, and civil unrest with riots in most major US cities, the stock market has been rallying. This would seem strange and difficult to understand unless viewed through the prism of what really drives market prices.

Presently, there are two drivers: first is optimism about the future. Right now, business conditions are not good and corporate earnings are dismal; however, the expectations regarding the third and fourth quarters of 2020 are strong. These expectations may or may not turn out to be correct, but nonetheless, they are affecting stock prices.

The second driver is massive liquidity created by the central banks and governments around the world including the US. Trillions of dollars [created and committed to be created by the central banks like the European Central Bank (ECB), the Bank of Japan (BOJ), the Peoples Bank of China (PBOC), and the Federal Reserve Bank (FED)] are flooding the system. These vast amounts of money eventually find their way into the stock markets and float prices up. So, for the time being, it is best to sit back and enjoy the ride.

The stock market rally since the March low has favored growth type equities, especially in the technology sector. This sector is poised to do well in almost all types of economic conditions. More recently (particularly the last few days), there seems to be a market rotation to more value-type stocks because they have lagged and are undervalued compared to their growth compadres. If this trend persists, it should help to close the gap between the performance of value relative to growth.

To repeat what we have said in a previous communique, we feel that there will be good opportunities, especially in two areas: technology and dividend paying companies that have long histories of consistent and increasing dividends. We are not necessarily talking about the highest dividend payers because they may not be able to continue paying them.

These are truly unusual times – the world including our nation is in turmoil and yet the market is rallying!

As always, please feel free to call or email us with any questions.

From your team at Southern Capital Services