It is hard to believe it has been a year since the equity markets were plunged into the crisis of COVID-19, reaching lows on March 23rd, 2020. But since then, markets have not only survived, they have thrived.
While that has surprised many, the reasons for the big recovery may be explained by some of the following points.
The equity markets and the economy are two separate things
It is not always easy to distinguish equities from the wider economy. But when investors buy shares in a company, or an ETF comprised of many shares, they are buying into the future visions and future earnings. In theory it is not what a company or a sector does today that defines its value, but the potential of what it could do tomorrow, and every day into the future.
So while COVID hit economies hard, and lockdowns crippled many businesses, those businesses and sectors that have withstood the tough conditions are being priced on all of their potential future performances, not just what they were limited to during the lockdowns. This means that investors are confident that businesses can return to some new state of normal, and even grow, in the coming months and years ahead. And given this new-found normal has resulted in more remote solutions, many Tech firms have performed extremely well in the past year, driven by innovation and a large growth in customer numbers.
The US Fed will do whatever it takes, as will other central banks
Trillions of dollars and Euros have been printed during the past year, and it is likely that printing of money will continue. This has been done to enable Central Banks to buy bonds, which support both Governments, Banks and Businesses to continue functioning. Buying bonds also has the effect of keeping interest rates low, which in turn has accelerated many share prices higher. The Central Banks have been aiming to keeping bond yields low to support businesses by enabling them to borrow cheaply and continue to operate in a near zero interest rate environment. Central banks globally have been extremely vocal that they will do whatever it takes to keep their economies functioning, and this has accelerated equities from 2020 lows.
Low interest rates mean there has been significant funds moving into equities
This chain reaction has been two-pronged. Firstly, with trillions of newly printed currencies floating about, this money has started to find its way through various asset classes, including equities, commodities and even crypto. This is because investors have been less incentivised to accept near zero rate of return from interest rates, and with more money being printed, have been moving into assets that often thrive in low interest rate conditions, like growth stocks. This is because the cost of capital in a low interest world is very small, so companies have been incentivised to chase growth, and for the time being it has not been at the expense of the shareholder to pursue this strategy.
Markets are back towards record highs, with global optimism about a return to growth
The S&P, Dow and Nasdaq indices have all touched new record highs many times already in 2021, and many benchmarks are still trading within a few percent of record highs. The twelve month returns below shows performance since the March 2020 lows and takes into account the strength of the AUD for ETFS that track the US markets. This is because the AUD has also moved up from US55c to over US76c in that time, up almost 40%.
What the chart really demonstrates is the need for investors to be patient for the medium and long term. While we would all love to have invested at the lows, those who sold as markets fell or did not dollar cost average may have missed strong gains experienced in the past 12 months. Although these 12 month returns are eye-catching, remember that investing does carry risk. You can read about the risks and fees relevant to investing with Raiz in our PDS. Finally, always remember past performance is not a reliable indicator of future performance and should not be relied on for making investment decisions.
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