On Tuesday, the Dow Jones Industrial Average – a stock index that tracks the performance of 30 large US companies – had its best day in almost 100 years... since 1933 to be exact.
If you think that might not be relevant because you are not American, you’d be mistaken. What happens in the US has huge implications for the rest of the world, for a number of reasons including that it’s the largest economy in the world, and that its stock market accounts for 60% of the world’s total.
In other words – what happens in the US impacts most of the world too.
So I thought it would be helpful to address what's happening in the markets these days – and what we can expect to see going forward.
As a disclaimer, as always, nobody knows the future.
We don’t know how long this pandemic will last, or what exactly the economic repercussions will be.
Some things, however, we do know.
We know that the United States is not taking enough of the precautionary measures required to effectively contain the virus, like South Korea or China did.
Therefore, it would be foolish to expect the same deceleration of infection cases as we’ve seen in those countries.
What we don’t know, however, is the extent to which that information is already priced into the stock market today.
You see, one of the most important things to know about the stock market is that it is forward-looking, not backward or present-looking.
That means that the stock market does not move in tandem with the news of the day, but with what we can expect of the future based on those news.
Every day, we get updates as to how the situation looks today – but markets are only interested in what that might mean for tomorrow (the future).
And two days ago, the US Congress announced an unprecedented package of measures to keep the economy going, worth $2 trillion.
This sends the message to the world that the US government is prepared – at almost any cost – to keep the economy going.
Stock markets loved that – and had their best day in nearly a century.
That being said, the US is no closer to defeating the virus.
So why did the markets roar back on Tuesday?
It all comes down to the bridge.
You see, before the pandemic outbreak, the US economy was strong. Corporate earnings were high, and unemployment was low.
And we know, based on two centuries of history, that at some point, the US economy is very likely to revert back to a strong economy with high earnings and low unemployment.
In the meantime, we are faced with the current downturn. A bear market turned into recession, with unemployment soaring.
This downturn is the bridge between the prosperous past and the prosperous future.
What we know is that at some point, we will get off the bridge – and we will face another bull market and a strong economy.
What we don’t know is how long we’ll be on the bridge. A month? Six months? A year? No one knows.
In the meantime, the US government has shown that it’s ready to do whatever it takes to fortify the bridge – and make it less likely to collapse.
Whether it will work or not, nobody knows. How long the bridge will be, nobody knows either.
All we know is that we’re on a bridge.
For us to see the end of the bridge, we need to know that we have found a way to tackle what caused this downturn in the first place: the virus.
That means we need to see a vaccine, a cure – or anything that can make markets confident that we will have it under control in the near future.
Although the bridge may just have gotten stronger, we are no closer to understanding how long it will be, and until we do, we are likely to see the markets react violently again on any piece of news – good or bad.
I will update you once that all changes.
Until then, stay safe.