Although the civil unrest in the United States continues to rage on, and the economic situation is still weak and unstable, the stock market has surprised traders once again. The Nasdaq index has surged by more than 10% since early January, while the S&P 500 index returned to the levels seen last year.
America’s economy continues to decline at a rapid pace despite fiscal stimulus and aggressive monetary policy implemented by the Federal Reserve. The rapid rise in prices could be explained by hopes that emergency measures would be effective and people would quickly return to normal life.
Lee Spelman from JP Morgan Asset Management noted that over the past years markets have been swinging from one extreme to another.
V-shaped stock market recovery
Experts made a point that with a quick economic recovery the Fed could stop supporting the stock market. Unprecedented regulatory measures have already led to a record drop in bond yields. This may happen in the stock market as well. Now, amid ultra-low yield on government bonds, the traditional portfolio balance of 60% of stocks and 40% of government bonds has lost its relevance. It no longer fulfills the previous function of diversifying risks and providing guaranteed income. Therefore, investors will either have to put up with falling incomes in order to maintain risk balance or turn to more profitable and, therefore, high-risk assets. In the long term, this may imply more risks for the financial system.