Low Interest Rates And Unprecedented Monetary Stimulus Continue To Push Stocks Higher
The U.S. stock market is closed due to the Memorial Day holiday but traders will likely keep their holidays short as S&P 500 is positioned to test the 3000 level soon.
Stocks keep rising despite the flood of negative economic data. U.S. Initial Jobless Claims reports have already shown cumulative job losses of more than 38 million since the beginning of the coronavirus crisis, while Continuing Jobless Claims are expected to stay above 25 million.
Some would argue that the market is going higher since it looks past the initial recovery phase and is not concerned with the current situation given the broad measures implemented by the world governments and central banks.
However, it looks increasingly possible that the main reason behind the market rally are expectations of perma-low interest rates which make stocks attractive even at high levels.
In A Low Interest Rate World, Even Expensive Stocks Are Attractive
Now that an unprecedented amount of money has been infused into the world’s financial system, it has to be parked somewhere. Traditional safe haven assets like government bonds are yielding almost nothing, and some countries, like Germany or France, enjoy negative yields on their ten-year bonds.
In these circumstances, investors’ “bar” for stocks is lowered. Dividend yield expectations for safer, blue-chip stocks are declining, allowing them to gain richer valuations.
This process allows the market to withstand the pressure from declining earnings forecasts. However, it remains to be seen whether the stock market will stay invincible to poor economic data and bad earnings reports.
U.S. – China Relations Are In The Headlines Now, But The Market Will Increasingly Focus On The Second Quarter Earnings Season
U.S. – China relations continue to deteriorate on a daily basis. The U.S. accuses China of a cover-up during the initial stage of the coronavirus pandemic and also tries to put pressure on China due to the upcoming security law in Hong Kong. In turn, China promises to retaliate if anti-China measures are implemented.
However, the market should be able to withstand this pressure in case traders and investors believe that the absolute bottom in corporate earnings will be reached in the second quarter and that it will be followed by a swift rebound.
The main question right now is how bad the second-quarter reports will look like. Given this uncertainty, the market may find it harder to gain ground after disappointing economic reports.
For a look at all of today’s economic events, check out our economic calendar.