Last week it was possible to observe a notable recovery in the main world stock indexes, where the S&P500 rose by18%, having had the best week since 2008, the Dow Jones had the best three days since 1933 and the Portuguese PSI-20 had its biggest rise in a decade. The question that has arisen from this is whether we have already reached the lowest point of that bear market and thus we are close to the start of a new bull market or if the worst days have yet to come.
In the essence of this appetite for risk is the monetary and fiscal stimulus of several governments and, in particular, the approval by the US Congress of the budget package proposed by the Donald Trump administration and the decision by the European Central Bank ( ECB ) to apply the 33% self-limit to the purchase of government bonds.
However, the most important variable is the final duration of the pandemic and the lifting of containment measures to restrict its spread. And as this is still not very predictable, its real economic consequences are unknown. What is contained in the price at which the indices are quoting are not the possible effects of this crisis, but the way the market feels about them. In reality, it is very difficult to project a company's future earnings when they have no idea how much they will be affected.
At the moment, fundamentals end up being of little importance since they are of low quality, but there is an expectation that markets will recover faster than the economy, leading to these days of greater confidence. Goldman Sachs estimates that the S&P 500 will end the year of 2020 with over 20% of current market levels, but there will be further falls in the markets before that happens. Moreover, the Volatility Index (VIX) remains at quite high levels reflecting the existing doubt about the consistency of a bull market.
The panic that led to the sale of shares seems to have subsided as a result of stimulus measures, but the markets remain focused on the news that invades us every day and its inherent uncertainty. Nevertheless, this makes it almost certain that it is difficult to say that the worst is over. Despite this, it could be normal to think that with all the stimulus that is expected, the perception of the future is now less drastic.
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