What's Driving Equity Markets

What’s Driving Equity Markets

Fiscal response has been impressive and is a primary reason why markets have seen such a sharp rebound from their mid-March lows. In a note that came out last Sunday Goldman Sachs’ economic team wrote that “disposable personal income is likely to register slightly positive growth for the year” attributed to the stimulus payment program rolled out by the government has been so robust. This prediction is predicated on the passage of ‘Phase 4’ of the government's response so not a done deal yet. We think this forecast for disposable income to actually grow in 2020 is on the optimistic side but the fact that the government has seemingly been able to buoy consumer spending is one of the reasons for the sharp bounce back in markets in the last month.


On the monetary side, the Federal Reserve has stepped into the credit markets to prevent a run on the corporate sector. A typical characteristic of recessions is that liquidity dries up in the credit markets, companies are not able to refinance maturing debt and thus must file for bankruptcy. By purchasing investment grade corporate bonds, the Federal Reserve has essentially backstopped a large chunk of S&P 500 companies from a liquidity crisis which has not been the case in past recessions. All bankruptcies have not been avoided, but as long as companies can get financing through one of the new credit facilities set up by the Federal Reserve hopefully bankruptcies will continue to be largely avoided by investment grade companies impacted by the virus.

Although these responses have seemingly been successful so far at supporting the economy, we reiterate that we are still approaching the markets in a very cautious manner. It is not hard to imagine how these unprecedented actions could have unforeseen consequences in the future. But for now, these are the factors we believe are driving equity markets.


Commentary Disclosures: Covington Investment Advisors, Inc. prepared this material for informational purposes only and is not an offer or solicitation to buy or sell. The information provided is for general guidance and is not a personal recommendation for any particular investor or client and does not take into account the financial, investment or other objectives or needs of a particular investor or client. Clients and investors should consider other factors in making their investment decision while taking into account the current market environment.

Covington Investment Advisors, Inc. uses reasonable efforts to obtain information from sources which it believes to be reliable. Any comments and opinions made in this correspondence are subject to change without notice. Past performance is no indication of future results.


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