The record high reached by Wall Street last week may come as welcome news for US President Donald Trump.
But the booming stock markets will not offer much comfort to the many millions of people who have lost their jobs and livelihoods as the coronavirus pandemic pushed the economies around the world deeper and deeper into the recession.
“This is the great American comeback!” tweeted Trump’s MP Mike Pence last Tuesday, after the S&P 500 stock index rose to a fresh historic high and the tech-rich Nasdaq reached one record after another in recent weeks.
However, the disconnect between the financial markets and the real economy could not be stronger, as coronavirus lockon destroys unusual number of jobs and even shoved traditional economic forces such as the US, Britain and Germany into unusual contractions.
The US economy, the largest in the world, shrank by 9.5 percent in the second quarter, Britain’s economic output shrank by 20.4 percent and Germany by 10.1 percent.
For many, stock market sentiment may then appear “inappropriate,” said Saxo Banque economist Christopher Dembik.
But that was a “misunderstanding,” he said, because it is a job of an investor to place bets on the economic outlook in the long run.
And with governments and central banks currently pumping large amounts of money into their financial systems to prevent a meltdown, and some companies in the S&P 500 upgrading their revenue forecasts for 2020 and even for 2021, the outlook could actually be rosier than the current economic data suggest.
“The stock market is not the economy,” said Richard Hunter, head of marketing at Interactive Investor.
– High tech –
A number of companies have already started publishing better-than-expected earnings with activity rebounding, as many countries began to reduce the draconian lockdowns imposed in the second quarter.
At a time when working from home, online streaming and social networking are an increasingly integral part of daily life, it is technology companies that are currently tending to shine, while other sectors of the economy are picking up the pieces of the economic disaster caused by the pandemic.
Apple, for example, posted a net profit of $ 11 billion in the three months to June. And its share price has doubled since March, taking its market value to more than $ 2 trillion, the highest ever seen on Wall Street.
In 2016, tech stocks held 20 percent of the S&P index. But its share has since increased to a third, according to Nicholas Colas, co-founder of the American company, DataTrek Research.
“Whether technology stocks should continue to turn is the multi-billion dollar question,” said Richard Hunter at Interactive Investor.
Patrick O’Hare, chief analyst at Briefing.com, seems to think they do.
“The stock market remains convinced that the (Federal Federal Reserve) will never, in the worst case scenario, allow a trading scenario to unfold for the stock.”
By lowering interest rates to zero and rolling out massive bond purchase programs, central banks such as the US Fed have placed a protective hand over their financial systems.
– Riskier assets –
In March, the US Congress approved a mammoth $ 2.2 trillion recovery package, covered in April with nearly $ 500 billion, and another is under discussion.
This encourages investors to bet on increasingly risky assets in their pursuit of returns, with stocks the main candidates.
While Wall Street is fluctuating, financial markets in other parts of the world are also performing well – the Japanese Nikkei index and Germany’s blue-chip DAX are close to their all-time highs – even if the mood is not so fierce.
“All the excess cash is systematically channeled to the US market, instead of to Asia or Europe,” Christopher Dembik told Saxo Banque.
Some of the enthusiasm was petered out at the end of the week and Wall Street’s performance on Friday was loud.
“One can not necessarily assume that it will translate into a lower closing for the stock market,” said Briefing.com analyst O’Hare.
It was a “known fact that this stock market in general has greeted every weakness as a buying opportunity.”
The end of August is a notoriously slow trading period, which could produce large price fluctuations at the very least news.
But with a U.S. Fed study showing that just over half of Americans own shares, it remains to be seen whether the current euphoria on Wall Street will last into November and the presidential election for Trump will swing.
alb / jmi / spm / bmm
