The US stock market appears to be defying reality. Since the March correction, the S&P 500 is back up to where it was and the NASDAQ is at an all-time high. This despite 190,000 Covid deaths (and counting), chaos over children returning to schools, record high unemployment, small businesses collapsing at an alarming rate, the worst political polarisation in recent memory, mass protests, mysterious military kidnapping and attacking citizen demonstrators. Suffice to say, there hasn’t been a whole lot of good news. Why, then is the stock market ignoring all of this?
The first explanation the pundits gave was that the stock market is forward-thinking and that it’s pricing in a recovery in a year’s time. In other words, this is all a moment in time that shall soon pass and be replaced by a great economic expansion. What do stock traders know that the rest of us don’t?
The second explanation is that the fiscal and monetary response of the government has resulted in about $3 trillion (that we know about) being dumped into the markets while lots of money has been printed to hand out to corporations and individuals to get them through this rough patch. The assumption then is that there’s a lot of new money in the system and it has to go somewhere.
The third explanation is that the stock market does reflect the economy - perfectly; just not the economy that we’d wish for. In other words, it’s merely exposing the ugly truths. As put by Vincent Deluard:
“Covid is just accelerating social transformation, concentration of wealth in a few hands, massive inequalities, competition issues and all that”.
As others have corroborated, the S&P 500 has become the S&P Big Five and they only employ 5% of the workforce which is half as much as they did twenty years ago. The biggest losers in the post-Covid economy are those which employ the most people: retail, financial and energy. Deluard uses an interesting measure to pick the corporate winners and losers by dividing the index into deciles based on “market value of intangible assets per employee”. This is equivalent to the price of a company’s intellectual property and brand recognition compared with the number of people employed, and it gives a pretty good indicator of how the company will be valued.
Another fun debate is whether or not we are in a bull market or bear market, a recession or a depression? The answer seems to be ‘all of the above’. The market is roaring while the VIX (aka ‘the FEAR index’) is also rising. There are signals of inflation such as rampant gold buying but, also, signals of deflation such as dollar debasement and increased household savings. Basically, the weathervane is pointing in all directions.
Perhaps, what has happened to the markets is similar to what’s happened to our socio-political environment. All risk, all volatility, all the time.
To be honest, I have been reading an increasing number of articles that foretold the death of America from about fifteen years ago. I believed in their thesis for a whole host of reasons but I think it really began in earnest with the Reagan Era and has just gained momentum over time. To see what I mean, consider the principles of the Constitution and the American Dream, two concepts that have been publicly eroded by political and cultural leaders of all political persuasions. Whenever a country and its people claim to be exceptional that’s generally the beginning of the end. It blinds them to their faults and allows them to rationalise terrible behaviour (remember the ‘virtues’ of torture after the Iraq War followed by children permanently separated from their families living in cages?)
The decline of America has been slow when measured by human generations. Then again, Rome didn’t burn in a day, either. Periods of decadence, however, foreshadow the end (remember 1920’s Germany?) Our stock market is probably telling us something. The writing is on the wall - quite literally in the case of Trump’s pet project. I’ve been reading about it for a long time now. I’ve been warning my friends about it. But now, finally, it seems to be coming true - and I’m not ready for it, yet. I am actually very saddened by it.