The S&P/ASX 200 Index (ASX: XJO) is eking out a small gain today of 0.56% at the time of writing. Despite this modest move, ASX shares are still down substantially this week, looking likely to end the 4-week winning streak we have seen over the past month.
It seems uncertainty abounds – and for good reason. We still aren't out of the woods yet in regard to the coronavirus.
And that's why I'm sure many investors out there are still nervous. The market crash we saw in March was brutal and understandably scared many investors.
But over in the US, things are better – much better. S&P 500 Index has recovered so strongly it is now only down 4.42% compared with a year ago.
Whilst I appreciate this is good news for investors over there, I don't think it really reflects what's happening in the global economy right now.
So why is this the case? Why are the US markets rising so strongly when the country is now the global epicentre of the coronavirus?
The 'Fed Put'
Well, the US central bank (the Federal Reserve) has been buying assets at an unprecedented rate, including corporate bonds rated as 'junk'. It now has well over US$5 trillion of assets on its balance sheet. For some perspective, the Gross Domestic Product of the entire American economy was US$21.4 trillion in 2019.
These actions lend a lot of stability to the financial system, which I think is a major reason why US markets have rallied so strongly over the past month. And in my opinion, this strength has also been helping to hold up our own ASX.
But how sustainable is this?
Well, who knows is the honest answer. This kind of monetary stimulus is unprecedented in modern history. Quantitative easing was unprecedented before the GFC and now it is being done on a whole new level. It might hold up the markets until the global economy emerges from the coronavirus and beyond. It also might falter when the damage eventually works its way through to the economic statistics.
Either way, I think the US markets are one of the things we ASX investors should be keeping a firm eye on. There's an old saying that 'when America sneezes, the rest of the world catches a cold'. This is firmly relevant today and we should all take heed, in my view.
