This market rebound occurred even as the economic picture deteriorated, highlighting the disconnect between market performance and the wider economic outlook. The question is, will this bounce last? While this recovery in equity prices is fragile, we think it may continue as long as investors embrace a better growth outlook on the back of massive monetary and fiscal stimulus, and they continue to see evidence that infection rates are past their peak. But the rally in equities would be on a much sounder footing if we were to see improvement in at least some of the following four areas.
SINGAPORE (June 12): The financial markets reacted to the Covid-19 outbreak with an unprecedented first-quarter drop, then turned around quickly. This appetite for risk in the face of the deepest recession since the 1930s is quite unusual, but the markets are being driven by optimism about potential economic improvement down the road so we can’t exclude a further rise in equity prices. During the first quarter of this year, the coronavirus caused the financial markets to drop faster than the average of all 11 bear markets since 1946. But despite unsettling economic fundamentals related to the pandemic, this bear market suddenly turned around far more quickly than its historical counterparts (see chart). Investors seemed reassured by news of a possible peak in coronavirus infections and related deaths, by the prospect of vaccines and therapies, and by massive amounts of fiscal and monetary-policy stimulus.
