US equities’ bullish run continued during the COVID-19 pandemic. Moreover, the divergence from the MSCI World index increased. What comes next?

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The COVID-19 pandemic created the fastest bear market ever. In its initial stages, the pandemic triggered the fastest shift from a bull to a bear market ever. By definition, when the stock market drops by more than 20% from its highs, it can be said to have entered the bearish territory.

However, what followed was a strong bounce, which led to the US stock market indices making new all-time highs.

One of the reasons for the quick bounce was the massive fiscal and monetary stimulus that the authorities launched. On the fiscal side, American households received direct checks as support throughout the pandemic, and part of these checks ended up in the stock market.

Online Trading Accounts Doubling During the Pandemic

Online brokers did enjoy the lockdown boom. The number of new trading accounts at brokers increased dramatically, in some cases more than doubling when compared to the previous years.

People suddenly had more money at their disposal (most Americans received more in benefits than their pre-pandemic income) and time available to watch markets. As such, the surge in speculative activities translated into more people participating in the market, and so the exponential surge is not surprising in hindsight.

While the rise in the monthly net new client accounts at US brokerages is impressive, the US rise in the US stock market is not. In fact, a quick comparison between the S&P500 performance and the MSCI Word reflects that the US stock market has long outperformed its peers.

The periods that followed the Great Financial Crisis in 2008-2009 and the COVID-19 pandemic in 2020 contributed to the acceleration of this trend. Because of the huge financial stimulus delivered by the Fed and then by the US Government, the US stock market divergence with the rest of the world increased exponentially.

What follows next? Will the US stock market correct, or will the MSCI World index catch up? It is difficult to believe that the divergence will increase in the future, but then again, looking at the past years, traders should not underestimate anything.

All in all, the US stock market remains bullish while close to its all-time highs. The real test comes when the Fed starts unwinding its accommodative measures.