Major averages headed for their biggest one-quarter gains in years. Both the Dow and S&P 500 were on pace for their best quarterly performance since 1998, surging more than 16% each. The Nasdaq Composite, meanwhile, was up 28.2% quarter to date and was headed for its biggest quarterly gain since 2001.
What’s causing the rally in these stock indices?
A combination of 1) Stimulus, 2) Positive trends in the virus, 3) Economic reopening and 4) Hopes for a vaccine drove stocks higher in Q2. As we begin Q3, only one of those tailwinds is currently in place: Stimulus. That doesn’t mean we’ll see a correction, but be suspect of market rallies until we can add more forces supporting stocks.
Not to mention, general market participants are also viewing these stock indices are discounted buying opportunities.
Economic activity has picked up in recent weeks after what in some places had been months of shutdowns to slow the spread of the novel coronavirus, Powell said in remarks prepared for a Congressional hearing on Tuesday.
“We have entered an important new phase and have done so sooner than expected,” Powell said. “While this bounce back in economic activity is welcome, it also presents new challenges —notably, the need to keep the virus in check.”
With output and employment still far below their pre-crisis levels, he said, “the path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus,” again saying that a full recovery is unlikely until people are confident it is safe to be out and about. Despite committing almost 3$ trillion in stimulus , the FED are definitely remaining on the cautious side, indicating economies may not be doing as well as markets think.
To further support the concerns above, the IMF also sees at least a 10% correction in markets as they failed to capture the severity and reality of the covid-19 situation, in the eyes of the IMF. This is somewhat true, stock indices are trading on 3x current market valuations, bolstered by forward looking optimism that could be deterred if we revert back into a lockdown situation. We are already seeing certain states such as Texas rolling back into strict lockdown conditions, is this a sign of whats to come?
What does this mean for you?
This new quarter will be essential for determining the medium-term outlook for US stock indices, any general improvements in covid-19 cases globally could see a further rally to the upside, however the recent outbreaks across China, US and Australia suggest the battle with covid-19 is still very much taking place. A new trend of isolated lockdowns could trigger US indices to sell off, ultimately it comes down to how the covid-19 situation progresses.
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