Hard to believe, but not necessarily hard to explain, given the weight of money governments are essentially printing to stave off outright economic collapse. It is the old axiom ‘don’t bet against the Fed’ writ large, so enjoy the ride, comforted by the belief that the economy will not slide into depression, and companies will not go bust – large ones at least – because governments won’t let them. And don’t worry about what this may add up to in the future – right now, no one can agree anyway whether the lack of growth or the monetary splurge means we face sharp inflationary or deflationary pressures in the years ahead.
Also look at what’s driving the rally. It’s tech, of course, the bedrock of the US market’s outperformance for some years now. Indeed, while the US benchmark is rebounding hard, the UK market is still looking decidedly soggy, the result of its dependence on oil, finance and other large economically sensitive companies and a near-complete absence of the type of technology the world’s recovery could be built on. But even here, we are seeing sharp rebounds that seem to defy the economic logic of our current experience.
Markets are, of course, supposed to be forward looking rather than reflecting the pains of the day, reflecting another age-old axiom – that the economy is not the stock market. I have always had a problem with this latter view, though. Okay, so markets and economic activity do not move in lock-step. But if markets do not reflect the economy, even the forward looking one, then what do they reflect? The distortion of asset prices by monetary policy, and the effect on investors’ collective psychology, perhaps answers that question.
Indeed, while it is impossible to dispute the importance of tech, there seems to be more than a hint of bandwagon-jumping in the shares that are doing well; the classic fear of missing out. Buy tech because everyone is videoconferencing; buy supermarkets because they’re the only place where anyone is spending any money right now; buy drug makers because we need a cure for Covid-19; and buy everything else because a cure is just around the corner (there is no sign yet). In each case, the evidence points to speculators trading very much on the here and now rather than on the rational assessment of future economic activity that should ultimately matter. We can clearly see how bad that economic reality is; how long the market can continue to stare it down remains the question.
