Global financial markets have brushed off a devastating pandemic, US civil unrest and fresh China tensions. How can Wall Street be so detached from the economic reality of our times?
The S&P 500, the index of the largest US-listed firms, is currently just 8% off its February high of 3,386, despite a coronavirus pandemic that shut down a large chunk of the global economy for the best part of three months.
US equities initially plummeted by more than a third, prompting fears of a Greater Depression than the one sparked by the Wall Street Crash of 1929. But even as the US jobless rate reached more than 40 million and consumption collapsed across dozens of countries, investors didn't remain on the sidelines for long.
Instead, the S&P has rebounded by about 40% since March, despite the US being by far the nation worst impacted by the COVID-19 pandemic. Germany's DAX index, meanwhile, is up 48% over the same period. Not even weak oil prices, exports falling off a cliff or an upsurge in US-China tensions have reversed the trend.
Even while often-violent protests erupted in the wake of the police killing of African American George Floyd, global stock markets have remained an oasis of calm, and in doing so, exacerbated public resentment about wealth inequality
"The American stock market seems immune to everything," New York-based stock market correspondent Markus Koch told the German business daily Handelsblatt this week. Indeed, many analysts say the disconnect between the strength of the financial markets and the economic reality has never been so stark.
US GDP dropped 5% in the first quarter, and some estimates suggest it may fall 50% in the second. Despite the relief that economies are now slowly reopening, social distancing measures are likely to remain in place for more than a year and will likely keep demand weak for years to come.
Why the huge disconnect?
In March, the US Federal Reserve and other central banks quickly intervened to prevent forced selling by banks who found themselves suddenly at risk of collapse when stock indices tanked. Over the past two months, central banks and governments have injected $15 trillion (13.4 trillion) in aid and fiscal stimulus — some 17% of last year's $87 trillion global economy, according to Reuters.
"Early intervention from central banks has helped to avoid a 2008-style scenario," Oliver Jones, Senior Markets Economist at Capital Economics, told DW. He said the Fed in particular drove down government bond yields, which also encouraged investors to hang on to equities.
The massive stimulus programs gave a clear signal to investors "that the Trump administration is fundamentally committed to ensuring that corporates receive all of the support they need, up until the November election, at least," said economics lecturer Kim Kaivanto from the UK's University of Lancaster.
The huge spate of layoffs and furloughed workers may have shocked Main Street but Wall Street quickly saw the upside; the pandemic would allow corporations to permanently trim costs, especially in sectors already undergoing huge upheavals, like retail and aviation.
Big Tech brushes off virus
The pandemic has been a boon to the pharmaceutical and tech sectors. Since mid-March, shares in Apple are up 40%, Amazon has seen a 45% rebound while Facebook is up 61% — thanks the huge demand for content and online shopping during the lockdowns. Along with Microsoft, Google's parent Alphabet, these tech giants make up about 20% of the S&P.
"These stocks have not surprisingly been very resilient — in relative terms, and those sectors stand to gain from the crisis," Jones said. On the other hand, firms in the energy and automotive sectors have been hit hardest, he noted, and are still trading at 30%+ below their pre-pandemic levels.
Bear market rally?
Those numerous analysts who warned of a dead-cat bounce have so far been proved wrong. A survey by CNBC found that a fifth of global Chief Financial Officers think the Dow Jones will continue to rally, without major declines along the way. However, more than half now believe the index will soon crash below its March low of 18.591.
"There's going to be a meaningful correction once people realize this is going to be a U-shaped recovery," Nouriel Roubini, professor of economics at New York University's Stern School of Business, told New Yorker magazine last month. "If you listen carefully to what Fed officials are saying — or even what JPMorgan and Goldman Sachs are saying — initially they were all in the V camp [V-shaped recovery], but now they're all saying, 'well, maybe it's going to be more of a U'."
"It's not different this time," Kaivanto told DW. "However, there is tremendous ambiguity about how public health, economic and monetary policy, and global events are going to play out over the coming months." He pointed to the volatility index of the S&P 500 which remains elevated compared to February before COVID-19 was declared a pandemic.
Jones, meanwhile, sees potential for the hardest-hit sectors to "make up a little more ground" as countries continue to emerge from strict lockdowns. But he doubts whether those industries that have rallied during the crisis "will continue to do so well."