“There is no alternative way to invest. Due to low interest rates, there is no other way out of the stock. Deposit accounts are no longer profitable, and in some countries they cost too much. Bonds don’t offer a significant increase in capital and this turns investors to new alternatives.”

The first quarter of 2020 was historic as the markets made the fastest “dive” in their history, which led to the fastest “bear market” in the history of markets. And the records didn’t stay there, as the second quarter was followed by the fastest increase in history by 42%, with the performance record being at 46% in 1929. In addition, during the second quarter there were a number of other records in the stock markets. In general, the second quarter was exactly as I had described it shortly before March expired: a quarter in which markets and economies would try to cover the largest percentage of losses.

The chart below shows the performance of the key markets for the second quarter. The biggest volatility was in the oil market, but it was also the one that subsequently recorded the most profits.

The S&P 500 and Emerging Markets recorded gains of 25% and 22% respectively, while the Nasdaq was at the top with quarterly gains of more than 35%.

Why was the 2020 recession different from similar periods in the past?

The diversity of 2020 is evident from many elements, some of which, if analyzed in depth, fully explain the necessity of the decision for huge support from both central banks and governments.

For example, from the beginning of the year until the end of June, the S&P 500 recorded 17 sessions in which there were movements greater than +/- 4%. This is a horror statistic as the average of similar movements in the period 1928-2019, is only 3.2 days.

Now, both the financial data and the stock markets are moving in the right direction. Although the market rally is already quite large, it is not something that, in my view, should scare investors.

Firstly, because according to all the data, the possibility of being at the beginning of a new bull market is extremely high.

Secondly, because even after this rally, the markets are still in negative territory, with the exception of the Nasdaq.

Thirdly, because more than 50% of significant shares experienced levels even in 2008.

Fourth, because the real economy hides significant macroeconomic surprises that will begin to appear and boost the market.

Fifth, because neither the existence of an effective treatment nor the existence of a suitable vaccine has been fully discounted yet.

Of course, the nearly 40% increase and general uncertainty in the short term as the virus continues to spread in the United States and lead some states to new measures of repression is a potentially volatile situation that could lead to increased variability. This needs attention. However, the probability of trying the March lows, in my personal estimation, is zero.

The course of employment is important for the further rise of the S&P 500. As employment returns to ever higher levels, the S&P 500 will look higher. This trend is clear in the following chart, where markets hit rock bottom two weeks before the vertical rise in unemployment (discount) and then the lower the unemployment benefits, the higher the index moves.


Having entered the second half of 2020, I will mention some reasons why investor optimism is justified and some reasons that are still a wake-up call for the developments that are open and ongoing.

4 reasons for optimism

1. Strong macroeconomic fundamentals: The US economy has entered the coronavirus crisis in one of its strongest and most solid periods of growth. The lightning recession that followed was caused by an external shock rather than a typical economic cycle end, which had caused the economy to overheat. The first reaction of the economy proved to be strong and this offers a strong hope for better days.

2. Reliable and coordinated support: Globally coordinated, strong, determined and unprecedented support from central banks and governments is the right medicine to heal the gap left by the lockdown. After a decade of liquidity support from central banks, investors now see all the financial weapons that a central bank has and the power they have.

3. Attractive ratings against bonds: With bond yields at low levels and their prices correspondingly high, stocks appear more attractive to investors, especially after the significant correction, which significantly increased the expected average yield for the next 5 years. In addition, the dividend yield of the S&P 500 remains higher than the yield of the bonds and this is positive for the shares.

4. Opportunities in many industries (generated Alpha): The coronavirus crisis has created great opportunities in many industries and in dozens of large stocks. In addition, the crisis accelerated the development of some trends, with the result that in addition to their better behavior during the crisis, we also see the unstoppable rise during the last two months. Large portfolios are placed in industries that will be the highlight of the decade.

3 reasons for concern

1. General Uncertainty: The horizontal lockdown is sure to create some structural problems in the US economy. Even despite the support that has already been provided. The assessment of this damage can not be done with certainty. For example, the rate at which bankruptcies peak will be very important as it will be possible to assess whether the damage could be easily reversed.

2. Risk of a second pandemic: Several US states continue to have an increasing trend in new cases, with the result that uncertainty continues to exist. Markets hate uncertainty. It is no coincidence that despite the rally, the VIX index refuses to fall below the critical 25.

3. New outbreaks of geopolitical tensions: In recent weeks, tensions between the US and China have risen again and the main reason is that the US and Trump continue to attack the Chinese over their responsibility for the spread of the pandemic. . There are new sources of tension for what is happening in Hong Kong. The fact that Trump is losing in the polls may be a small guarantee that he will not try to expand on this issue, as it would further aggravate his already difficult election position.