Stock market recovery during an economic drama
The classic investor’s answer to what is currently happening, is that the financial markets look beyond the cycle and are taking a headstart on economic developments. This would explain why share prices came down so rapidly in March; the markets were running slightly behind and had some catching up to do. And the recent recovery is supposedly due to the fact that things are not quite as bad as everyone seemed to think.
But things are bad, as COVID-19 has hit us hard. Corporate earnings projections and the economic outlook have only been downgraded further. Unemployment figures have shot up faster than ever before. Again and again, we find that the economic contraction can get worse still and that the recession may last even longer than expected.
This week ECB president Christine Lagarde added her pennyworth by predicting that this year the European economy may well contract by between 8 and 12 percent.
Bad news? More money from central banks
So, where does all this cheerfulness and optimism on the financial markets come from?
First, nowadays bad news is grist to the mill of the investment community. On the day that the sharpest increase in unemployment in US history was announced, stock markets soared. Because bad news means that there is a good chance that central banks and governments will inject even more money into the economy.
The figure now stands at USD 15 trillion and we are still counting. Of this amount, around USD 6 trillion has come from central banks and USD 9 trillion has been contributed by governments. A large part of this money, especially the money that is being contributed by central banks, remains somewhere in the financial system.
So why are we doing this? Mainly to ensure that those who have an interest in saving the current system do not suffer any adverse effects. In other words, we rescue people who have money - and who sometimes have a lot of money.
Not a cloud in the sky for Amazon
Investors are also optimistic because some companies are hardly affected by the coronacrisis, if at all. Indeed, companies like Amazon and Google and other tech companies are actually seeing their revenues increase. And by chance, these are also the companies that have strong balance sheets. Their share prices are the ones that are actually recovering fastest. And, finally, the markets are short-sighted. To such an extent even, that a slower rise in unemployment (but still an unprecedented increase) is interpreted as a positive sign: the crisis really is not quite as bad as we had thought. Tell me another one!
L'argent pour l'argent
The many trillions of euros that are being injected into the economy should not be used to support the financial markets. They are meant to be used to support the real economy, to avert a financial crisis and to help people resolve their problems. But that is happening only to a limited extent.
It is happening with certain measures that are meant to help companies and households weather the worst of the crisis, but much of the USD 6 trillion contributed by central banks is not used for that purpose. We could for, instance, also put that money to good use by spending it on realising the sustainable development goals. Or on building a completely new hydrogen infrastructure in Europe, or on making all houses sustainable. These are just a few random examples.
But now all that it is used for is to ensure that financial assets do not depreciate. Throwing money around to preserve money. That has nothing to do with the real economy. With issues that are important to people. For our future. The more money is spent on preserving wealth, the less support there will be for such actions. And the larger the debt that we will eventually have to repay.
This is unsustainable and not sensible. Money should go to people; it should not go to money.
For more related news, views, insights, and economic outlooks regarding COVID-19 and the economic crisis, visit the COVID-19 page on our website.
Or read other columns by Hans Stegeman.