How the world economy and the stock market evolved since then
A year after the Covid pandemic forced the nation into a shutdown, the stock market has been overhauled in ways Wall Street never imagined. Last March, stocks plunged as the world faced the frightening spread of a virus. The SP500 lost more than 15% of its value between March 11 and March 12. The index plummeted more than 30% by March 23.
What followed afterwards was the twin booster engines of monetary and fiscal policy that came with such magnitude and speed, the SP500 is up nearly 80% from the low that March and just hit a fresh record on the stock market in the week of March 14, 2021.
During the earlier phases of pandemic, with Feds lowering interest rates close to 0, and buying $120 billion of corporate bonds (which it continues to do till date), it provided the much needed liquidity in the economy that prevented large scale bankruptcies and the possibility of a long term recession turning into a depression. With interest rates near 0, and prolonged national lockdowns that forced organizations and workforce to shift towards “digital”, we witnessed a period of accelerated digital adoption that took place in a matter of months that would have otherwise taken at least half a decade. And with that tech stocks started flying higher and higher. We saw stocks of companies such as Zoom, Netflix, Peloton, Amazon fly through the roof.
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As the economy slowly began to reopen with stabilization of Covid 19 cases starting November 2020, we witnessed money move out from tech/growth names into recovery themed stocks, such as energy, industrials, financials and materials. Today, where we stand, the non-tech sectors, especially the ones in energy, financials and industrials are outpacing the high-flying tech stocks that were thriving in the earlier phase of the recovery.
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At a macro level, an economy goes through a full cycle every 7-10 years. Corporate earnings, interest rates, inflation and other factors that change as economies expand and contract can affect the performance of various businesses and the performance of their stocks in the stock market. Understanding the cycle enables investors to evaluate and adjust their sector exposure, as the likelihood of a shift from one phase of the cycle to the next increases.
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However, unlike a generic economic cycle, the Covid-19 induced recession is fundamentally different. Unlike prior recessions, there was no endogenous buildup of unsustainable forces that led to the decline in output. Covid 19, in many ways could be compared to a natural disaster. This meant that the recession could be deep and painful, but it is unlikely to last very long. The three big characteristics that make Covid 19 induced recession fundamentally different from a recession induced by credit crisis as we saw in 2007 Great Financial crisis are:
<aside> 💡 Consumer Price Index a.k.a CPI used to measure inflation vs Fed’s PCE Index
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Inflation in February was muted. Core consumer inflation, which excludes food and energy prices, was flat. But the producer-price index, which measures prices paid by companies rose 1.3%, up from a gain of 0.3% in December. This means companies are beginning to pay up for things such as raw materials.