Stock market rallies despite coronavirus outbreak
Little has changed about the fundamentals since last week's selloff that was the worst in months, but bullish stock traders have bid back all of the the S&P 500's losses and sent the Nasdaq to a new record high.
What's happening: The market continues to bet on generous central banks providing stimulus to help the global economy recover from the novel coronavirus outbreak that has stalled supply chains, closed businesses and quarantined millions of people.
- The People's Bank of China has obliged already, cutting banks’ reserve requirement ratios and pumping hundreds of billions of dollars into markets to help stabilize the Shanghai and Shenzhen stock exchanges, which fell to their lowest levels in a year on Monday.
More is expected from China in the coming days. The PBOC is seen lowering its key lending rate and continuing to pump cash into the banking system.
On the other side: Most commodity prices have seen no such rebound thus far, with oil falling by 20% from its last high and now in a bear market. Metals like nickel, aluminum and lead also have continued to fall.
- Copper prices, seen as a proxy for expected global growth, rose by 1% on Tuesday, but are down 8.5% year to date.
Why it matters: There are not yet signs global growth will recover from the coronavirus shock, yet the Dow is trading at a price-to-earnings ratio of nearly 20 and the Nasdaq's P/E ratio is over 29, according to FactSet data.
- Both figures are well above historical averages and even higher than earlier this year when top investment strategists warned that valuations had gotten especially high and looked poised for a pullback.
- Stocks will likely need strong economic growth to live up to their current valuations.