Whatâs Going On Here?The US stock marketâs key index, the S&P 500, rose above the level at which it started 2020 this week â and itâs only about 5% away from Februaryâs record high (tweet this). What Does This Mean?Ever since the dramatic stock market selloff in March, investors have been encouraged by promises from major central banks and governments that theyâd do whatever they could to shield companies and workers from the coronavirus pandemic. And more recently, those investors have been further emboldened by business reopenings â so much so theyâve been buying up stocks in their droves.
But not everyone feels the same way: others think stock markets are now âpriced for perfectionâ, and that unexpected bad news â like job losses or business insolvencies â could derail the marketâs recovery. That fearâs likely been compounded by this recovery's dependence on big tech companies, which have helped the USâs tech-focused index â the Nasdaq Composite â rise 40% from its March lows to a record high this week. Why Should I Care?The bigger picture: The stock market isnât the economy.
Stock markets reflect whatâs expected to happen in the economy before it actually does â and even then, they're a better reflection of that economyâs biggest companies than the economy as a whole. That was driven home by the World Bank earlier this week, which now predicts the coronavirus-tanked global economy will shrink by 5.2% this year â the most since World War II, and an outcome thatâll force millions into poverty.
For markets: Put your money where your mouth is.
Some investors â like hedge funds â have positioned their investments so that if markets fall again, any losses will partly be offset by other assets using âput optionsâ. Puts give an investor the right to sell shares at a predetermined price, meaning theyâll be able to recoup some losses from the fall of the shares themselves. | 