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US Stock Markets Rally Even as Economic Crisis Deepens

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  • US stock markets have rebounded sharply over the last three weeks. While there are signs that the health impact of COVID-19 might be peaking, estimates of economic pain are rising exponentially.
  • The IMF expects this year’s economic growth to be the worst since the Great Depression. Goldman Sachs expects the second-quarter GDP in advanced economies to fall 35% in the second quarter.

US stock markets

US stock markets have staged a smart rebound from their March lows. Equity markets crashed in the first quarter amid growing concerns about COVID-19. The Dow Jones Index (NYSEARCA:DIA) had its worst first quarter ever. Globally, financial markets have rebounded amid hopes that COVID-19 cases might be peaking or close to peaking. However, weeks of lockdown have taken a toll on global economic activity. Several institutions have released their assessment of the pandemic’s financial cost. The figures don’t look encouraging.

IMF expects growth to fall sharply

The IMF called the current financial crisis “the Great Lockdown 2020.” Notably, the IMF expects global growth to fall 3% this year. To put that in perspective, global GDP contracted 0.1% in 2009 during the Great Financial Crisis. Analysts have lowered their GDP estimates since the duration of the lockdown has increased. When the pandemic started, it was mainly a health issue. Globally, governments have announced lockdowns to combat the deadly virus. As a result, the financial costs have been rising.

Have US stock markets bottomed?

While US stock markets have rebounded, they might not have bottomed out. Paul Tudor Jones expects a double bottom. Citi is also skeptical about the equity market rally. According to Mark Mobius, stock markets haven’t bottomed yet. Read COVID-19: Have US Stock Markets Bottomed Out? to see what leading brokerages are saying about US equity markets.

Goldman Sachs on the economic impact

Goldman Sachs expects the GDP in advanced economies to fall 35% in the second quarter. That’s four times worse compared to what we saw during the peak of the Great Financial Crisis. Governments across the world are pouring money into their economies to compensate for the economic hardships caused by the pandemic. However, every day of the lockdown adds to the financial pain.

While US stock markets have rebounded, we need to watch out for upcoming earnings and economic data points. Economic data points from China show that the recovery could be sharp after the pandemic is under control. The Shanghai Index has only fallen about 7% this year based on Tuesday’s closing prices. Read Is the US Stock Market Crash Worse than China’s? to analyze the divergence between Chinese and US stock markets.

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