NEW YORK (Reuters) – Risk assets such as stocks and high-yield corporate bonds have climbed over the past two-and-a-half months despite a dire global economic outlook in the wake of the novel coronavirus pandemic.
The rally has left some market observers scratching their heads but has also given rise to a bundle of jargon – some old, some new – attempting to explain recent trends. Here’s a guide to what’s driving financial markets now, in Wall Street’s own words.
DON’T FIGHT THE FED
One key factor in Wall Street’s climb, strategists say, is the unprecedented monetary support from the Federal Reserve, including purchases of corporate bonds and exchange-traded funds. The Fed’s balance sheet has expanded by some $3 trillion since March. Those actions have revived the slogan “Don’t fight the Fed,” as the liquidity supplied by the U.S. central bank has fueled an upward trend.
“Every time the stock market starts to sell off, the Federal Reserve responds with some accommodative policy,” said Mike O’Rourke, chief market strategist at JonesTrading.
As markets keep climbing, more people are being prodded to jump in. Retail investors unexpectedly increased their stock exposure throughout the selloff and rally, and some institutional investors are now following suit, Deutsche Bank strategists wrote earlier this month. Some market watchers chalk that up to the “fear of missing out,” or FOMO, as concerns over the coronavirus pandemic begin to recede.
“We have some good news coming in now, so investors are scrambling to grab equities again,” said Andre Bakhos, managing director at New Vines Capital.
After hitting a four-year low in March, prices of the riskiest U.S. corporate bonds have been driven higher alongside stocks by FOMU, or fear of massive underperformance, said William Zox, portfolio manager at Diamond Hill Capital Management. As the rally in risk assets took off, conservatively positioned investors may have found themselves falling behind peers. FOMU pushed them to raise their risk exposure, driving the rally further, Zox said.