BIS Quarterly Review, September 2020

Markets rise despite subdued economic recovery

Financial markets recorded steady gains during the period under review, after the acute stress in March. The rebound in valuations was underpinned by supportive monetary and fiscal policy, particularly in some advanced economies (AEs), as well as evidence that the plunge in economic activity had been arrested. Yet the economic upturn remained incomplete and fragile. Consensus forecasts indicated that a return to pre-crisis trend growth rates was unlikely. This raised questions about whether risky asset prices had disconnected from the underlying economic outlook.

There were clear signs of historically high valuations in equity and corporate credit markets. US and Chinese stock indices extended their April and May gains, surpassing in August the lofty early-year levels. In other equity markets, the upswing was more moderate. And the gains were restricted to a limited number of companies. Amid some recent volatility, technology and health care stocks globally outperformed while energy and financials lagged, possibly reflecting structural changes induced by the pandemic. In credit markets, spreads narrowed to long-term historical levels, despite evidence of deteriorating credit quality. Heavy issuance across the rating spectrum, especially in investment grade, though to a considerable extent precautionary in nature, added to the heavily indebted capital structure of many firms.