The contrast between stock markets and what is going on in the real economy of output, trade and jobs could not be more stark.
Equity indexes, as the late Nobel Prize winning economist Paul Samuelson observed, are not the best of economic indicators. He famously quipped ‘the stock market has predicted nine of the past five recessions’.
As Covid-19 moved out of Asia to Europe and the US in the early months of this year, share markets saw the hurricane coming much faster than Western governments, including Boris Johnson who played truant from five Cobra meetings.
As Covid-19 moved out of Asia to Europe and the US in the early months of this year, share markets saw the hurricane coming much faster than Western governments
The strongest bull market of modern times collapsed and, for a time at least, many people dared not look at the value of their pension funds or ISAs, which suffered large losses as the bears took charge.
The switch out of shares and corporate bonds into the relative safety of US Treasuries was so ferocious that central banks threw everything they had at the problem in late February and early March.
The US central bank, the Federal Reserve, pumped trillions of dollars into financial markets and the Bank of England – in Andrew Bailey’s first days as Governor – slashed interest rates to the record low of 0.1 per cent and began pumping £200billion into the economy. Nor is the Fed done, with chairman Jay Powell pledging further measures.
Those who view stock markets as a barometer of future activity would say that this year they made a nonsense of Samuelson’s quoted dictum.
Just look at the real data coming from the US, British and global economies. Unemployment in America has soared to 20m, or 14 per cent of the workforce.
In the UK gross domestic product in March fell 5.8 per cent and output overall in the first quarter plummeted by 2 per cent, the worst outcome since the financial crisis.
Monitors at Unctad, the UN’s trade and development body, report a 3 per cent decline in trade in the first quarter, which could turn into a 27 per cent rout in the April to June period.
If we were to trust the stock market as an indicator then we would believe that this health-induced crisis will self-correct very rapidly.
The S&P 500 broad measure of US share prices has stormed back, rising by 30 per cent since its nadir.
The FTSE 100 has come back, and hovers around the 6,000 mark. This, despite the distressing data from the real economy and the disastrous dividends cuts from corporate Britain with notable exceptions such as Vodafone, BP and Tesco.
What is to be trusted, the Office for National Statistics and forecasters in the City – or the unexpected bounce on the stock market?
In many ways the upbeat stock market is a response to government actions. Central bank support for economies is bigger than at the time of the financial crisis so there are huge sums looking for a home.
Interest rate cuts have made riskier equity investments more attractive to some funds than bonds. The Fed and Bank of Japan have shown a willingness to buy assets such as exchange traded funds and corporate bonds as never before.
And the fiscal response, such as the UK’s extended furlough scheme, is helping to keep companies, some of which should have gone bankrupt, alive.
Share markets and investors are receiving an enormous subvention. But it is not going to be enough to lift a slumping global economy out of depression any time soon.
Piling it high
Dave Lewis has done a remarkable job in restoring Tesco’s trust with consumers, suppliers and the financial community.
Pay committee chairman Steve Golsby has done the chief executive Lewis no favours by changing performance criteria, delivering a pay gusher of £6.4million for Lewis in the middle of Covid-19.
Tesco has done good stuff in this crisis, not least hiring an army of extra staff to make sure groceries do not run short and more people get deliveries.
Even with bonuses the pay for frontline Tesco workers is pitiful and Lewis’s pay cheque gratuitous. He should donate his bonus to a welfare fund for staff or upgrade his contribution to the Mail Force charity for healthcare workers.
Feel good
The value of the London Stock Exchange to UK plc can be easily undervalued.
It is hugely encouraging to learn that since the start of March 15 small healthcare and pharma companies have raised £190million of new capital. Skol!
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