Why did the stock market recover whilst the economy is still so dismal?
Covid has been with us for between seven and ten months depending where you live, and it is trite to say we have never seen anything so bad in generations and the effect on the economy was profound.
Nobody is quite sure what to do: Masks or no masks; Lock down or build the economy; Open the borders for tourists and risk a second wave? Scientists seem no closer to a definitive answer, doctors now shun respirators and economists are similarly bewildered.
The biggest question from investors is why the Markets tanked in March and then recovered most of their losses almost immediately. The entrails have been picked over for the past few months, but we are reminded that we still do not have all the answers to the 2007 crisis. Quantitative easing in 2008 was predicted to lead to hyper inflation and now central banks are more concerned with deflation, a far more dangerous situation.
The quick answer to why the stock market has kept up whilst the economy has had its worst quarterly contraction since the Great Depression in the late 1920’s is that Gross Domestic Product is measured looking backwards and stock markets try to predict what will happen in 18 months’ time. The fact that since the Federal Reserve has pumped Billions into the Market at a very much faster pace than 2007 and 2008 and now that liquidity is looking for yield only to find a decent return in stock markets is a major factor.
Rory Kutisker-Jacobson, a portfolio manager from Allan Gray has put together a summary which helps make sense of the situation. He also points out the risks and returns in present markets, with the top few shares on both the JSE and S&P severely skewing returns and wonders if the present situation can continue. The article is attached for your reading pleasure.
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Keep safe. It is not over yet.