As the coronavirus wreaked havoc on markets, governments and central banks around the world stepped in in an effort to prop up prices.
In March, President Donald Trump signed into law a record $2 trillion federal stimulus package known as the CARES Act, while the Federal Reserve announced that it would engage in unlimited asset purchases.
While the collapse in economic activity is historic, so too is the global policy response to cushion the impact and support a recovery as containment measures are relaxed, JPMorgan strategist Marko Kolanovic said in a recent note to clients.
We estimate the impact of Fed easing in both rates and credit more than compensate for the temporary hit to corporate earnings when valuing the US market via discounted earnings, he added.
As part of its stimulus measures, the Federal Reserve in March slashed interest rates to near zero. At the central bank’s most recent meeting at the end of April, it pledged to keep rates at historic lows until the economy recovers. This supports economic activity since it makes borrowing money cheaper.
“Interest rates are going to be extremely low — barely positive — for a very long period of time, so that does provide some support to equity prices,” noted Orszag.
Amid the ongoing uncertainty, Kate Moore, head of thematic strategy for BlackRock’s Global Allocation Team, said it’s important for investors to look beyond the noise and determine who the winners on the other side will be.
She believes the market is moving higher due to three reasons: the slowing rate of infection, the gradual reopening of states’ economies, and the improving relations between the U.S. and China.
We need to continue to get government and policy support in order for the market to move forward, and for us to not just be reacting to some slightly incremental better newsflow, but to something that’s more fundamentally driven, she said.
While many unknowns remain and the path forward is far from certain, famed investors are quick to note that the U.S. has bounced back before.
“Nothing can basically stop America,” said Warren Buffett, chairman and CEO of Berkshire Hathaway, at the conglomerate’s first virtual shareholder’s meeting on Saturday. “The American miracle, the American magic has always prevailed and it will do so again.”
(Sources: CNBC, Warren Buffett, Michael Bloom, Orszag, Marko Kolanovic, JPMorgan)