The world’s largest economy is burning and the global death tally from coronavirus continues to rise but investors are piling into stock markets.
In New York, retail giants were boarding up their glitzy stores last week bracing for the carnage from the riots spurred by the killing of African-American George Floyd at the hands of police in Minneapolis.
But nearby Wall Street appears unaffected by the chaos, where stocks have surged to within record levels as the United States added 2.5 million jobs in May after stripping more than 20 million in April.
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This was viewed by many as a sign the country had witnessed the worst of the pandemic-induced recession, and investors scrambled back into the indices.
The Nasdaq composite has wiped out all of the losses inflicted during the pandemic and set a new record high overnight, while the broader S&P 500 climbed to within 4.5 per cent of its own all-time high and is back to pre-lockdown levels.
This is despite the World Bank forecasting further financial pain, saying today the global economy is on the verge of plunging to its deepest recession since World War II.
Australian shares have followed as the ASX trades more than 2.6 per cent higher today, and while stocks have now reached the heights to earn the bull market label experts warn buyers may have bolted too soon.
“I don’t think you can say there is a fundamental justification for stock markets rallying this aggressively this soon,” he told news.com.au.
“There’s certainly an element where the economic outlook looks better than it did a couple of weeks ago,” citing the positive jobs data out of the US from the end of last week.
“But if you look at price action itself, market valuations are at multi-decade highs and we’re seeing certain stocks and segments of the market that are very high risk, exhibiting behaviour which is very much divorced from fundamentals.
“At the end of the day this is a central bank proven rally where, yes, there is a bit of optimism in the market but with all of this stimulus, liquidity in financial markets is driving stock prices higher.
Mr Rodda said fear of missing out is kicking in to buy shares in conditions he described as “parabolic”, as “investors chase risk and return”.
This concern is shared by critics from the US, who said investors may be setting themselves up for disappointment as the potential for a second wave of infections looms large.
“It all starts with the virus itself, and there hasn’t been any immediate rise in infections,” said Tom Martin, senior portfolio manager at Global Investments, who still remains far from giving the all-clear to buyers.
“There’s a lot of risk that businesses and the economy don’t recover as fast,” he said. “When money starts running out in July, are we enough on a path to getting people employed and businesses open?”
DEEPEST RECESSION SINCE WWII
The World Bank has warned the pandemic will see the global economy plunge into its deepest recession since WWII, forcing “many millions” more into extreme poverty, according to its latest economic outlook.
Global output will shrink by 5.2 per cent in 2020, economic activity among advanced economies is expected to shrink 7 per cent, and emerging economies will contract by 2.5 per cent – the steepest fall in 60 years.
“Per capita incomes are expected to decline by 3.6 per cent, which will tip millions of people into extreme poverty this year,” the report said.
The grim forecast comes as Australia enters its first recession in close to three decades.
The Reserve Bank predicts our economy will contract by six per cent in 2020, with World Bank economists saying that under a worst-case scenario global GDP could shrink by almost 8 per cent.
– with AP