Daily investors are asking questions to themselves why the markets are going higher and higher despite the severe impact of covid-19. They are unable to find any logic or valid reason for the same. They remain skeptical and are surprised too.
The answer to their dilemma is very simple. As you all know that stock or commodity prices are derived from the demand and supply gap.If the demand is outpaced than supply the prices are bound to go higher.
Then comes a second question to their mind that from where the demand comes when major businesses have been severely affected by lock-downs and shortage of labor because of covid-19. The answer to this is also very simple-Liquidity.
Then again comes the third question in their mind that from where the liquidity finds its way to the markets when at a ground-level situation is not supporting it. The answer to this question is again very simple-Governments.
Governments world over have been very proactive and they could foresee the problem which could arrive because of covid-19. They started pumping liquidity into the market by announcing stimulus packages immediately to avoid any paralysis effect on the economy. Simultaneously they started developing the vaccine to combat covid-19 at the earliest.
Once the liquidity is injected into the system it finds its way to markets. Now too much liquidity chasing few stocks or commodities creates higher demand outpacing the supply and the upward price cycle continues.
So feel-good factor on both fronts (1) development of a vaccine for covid-19 and (2) prices going higher build the confidence among participants. New hope is created and the market always likes it so no stopping to it.
I think I have tried to explain the investor's concerns the simple language without going into the complexity of economics.
I will take this opportunity to thank all the Governments of the world for their responsible action and supporting a common person in the time of crisis.
Thank you for listening and sparing your valuable time.
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