DJIA : V-Shape Recovery ?
(Tue, 25 Aug 2020). The U.S. stock market has undergone a V-shape recovery. Now, economic growth and business productivity are speeding up. Buoyed by hopes of a potential vaccine, market analysts are calling for an economic recovery globally while implying that the stock market may have already bottomed out in Q2 2020.
After four months of a downtrend, Citi Private Bank`s strategists say global activity rebound is "extremely sharp, V-shaped in fact." Weekly indicators show a clear rebound in corporate revenues, which means the stock market likely bottomed out in Q2. Rising liquidity, strengthening economy, and growing business productivity could catalyze stocks in the medium term. The U.S. stock market has undergone a V-shape recovery since March, in spite of the slowing economy. Economic growth and business productivity are speeding up, raising the chances of an extended bull market.
Led by Big Tech, the S&P 500 rose by 53.36% since March 23, rebounding beyond the pre-pandemic peak by 1.33%.
Stock Market Rallied In Spite of Slowing Economy—What Happens If Economy Rebounds?
On CNBC’s “Street Signs Asia,” Yardeni Research president Ed Yardeni said Q2 was the bottom for revenue and earnings. Citing high time frame indicators, the strategist noted that various data points pinpoint the recovery of revenues. In Q2, corporate dividends dropped to levels unseen since 2009, as companies rushed for safety amidst the pandemic. Technically, declining buybacks and dividends should have placed selling pressure on the stock market. The unexpectedly strong performance of Big Tech, especially Apple, has offset downside risks in the equities market. If the stock market expanded despite the fading economy in the first half of 2020, economic certainty could fuel the momentum of equities. Strategists find the gold rally is becoming overheated. Would this translate to retail investors flocking to the stock market?
Citi Private Bank noted that the U.S. economy could see signs of struggle until the end of the year. As the inventory clears and the country recovers from the pandemic, the bank said it could drive more industrial activity. A rise in industrial activity and trade, over the medium term, would result in a spike business productivity. Especially for large corporations that dominate the stock market, recovering business productivity would be a catalyst for growth.
The Equities Market and the Economy Are Not Unrelated
One persistent narrative around the stock market’s uptrend since March has been that equities are not the economy. Due to the discrepancy in performances between stocks, analysts said the economic growth rate is not a relevant metric to evaluate the stock market’s trend. In a note, Renaissance Macro Research economist Neil Dutta hinted the market is not completely separate from fundamentals. Several metrics that profoundly affected the U.S. stock market in recent months are a part of the broader frame of economic growth. For instance, if the unemployment rate continues to slide as a consequence of economic certainty, the stock market could positively react to it approaching the year’s end.
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