Coronavirus: why are stocks markets booming in the middle of a pandemic?
Analysts offer wealth of explanations for disconnect between Wall Street and the high street
Yet US stock markets are near all-time highs and other world markets are recovering steadily. So what is behind the unexpected disconnect between Wall Street and the high street?
What has happened?
Despite the US approaching its steepest downturn since the Great Depression, the country’s stock indices are nearing all-time highs, with valuations closer to the 2000 dot-com bubble than the depths of 1929.
Indeed, “having risen a whopping 35% from a late March trough, stocks looked set to kick off June with more gains”, Reuters reports.
Why are stocks rebounding?
Economists point to a range of different drivers for investors’ confidence.
Diane Swonk, chief economist at Grant Thornton, believes that “many investors still see the world through pre-pandemic-tinted lenses”.
Many expect the recovery to follow similar patterns to those that came after previous recessions, ”and don’t see the much larger and longer-term challenges created by Covid-19”, Swonk writes in a Foreign Policy article that compiles various experts’ views.
Mohamed A. El-Erian, chief economic advisor at Allianz, has a different take. According to El-Erian, investors believe - falsely - that right now they simply can’t lose.
“They win if - based on the notion that stock markets can see past the short term - the economy quickly returns to normal; they also win if it doesn’t, given that the US Federal Reserve has repeatedly demonstrated that it is both willing and able to backstop markets,” he writes.
Unfortunately, this belief fails to take into account the economic and business fundamentals of each company - and many companies are going to continue to struggle, even after coronavirus lockdowns in countries across the globe are fully lifted, El-Erian says.
The New York Times, meanwhile, attributes the broad rise to “bargains and bravery”.
Or to put it another way, investors in search of good deals are buying while the market is low.
“We will never get these prices again,” said Cole Smead, a portfolio manager at the Smead Value Fund.
There is also a “fear of missing out,” the newspaper adds. “As shares rise, professional money managers feel pressure to buy stocks to protect their reputations.”
According to Business Insider, the reason stock markets are rising now is that investors think the economy has already bottomed.
“Investors think April was the low point for the economy and things could start to improve – or at least not get worse – from here,” the news site says.
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What does a rising stock market tell us?
“No one has a crystal ball,” says David Taylor, business reporter for Australia’s ABC News. “You could argue, however, that the share market is the closest you might get to one in this world.”
The reason for this, Taylor says, is simple: “The share price of a stock represents what analysts believe the company will be worth in a few months’ or year’ time. It’s not what it’s worth based on its earnings today.”
But what a rising stock market doesn’t speak to is the health of an economy.
“Wall Street types like to believe that the price of the stocks they peddle somehow represents the value of a business or the state of the economy. Nonsense,” economics reporter Eduardo Porter writes in Foreign Policy.
“It would be a mistake to conclude that markets believe this recession will be V-shaped, with the economy ready to bounce back sharply in a few months. Markets have no clue. And it likely won’t be so rosy,” he concludes.