And what if the market is right?
Full of disbelief and sometimes with outright disapproval, the remarkable recovery in the stock market since last spring’s crash has been watched. According to renowned institutions such as central banks, the IMF, the OECD, and the CPB, the economy is set to contract at rates we have not seen since the Great Depression of the 1930s. The months of lockdowns have wreaked havoc on the economy and will have an impact on corporate profits. If there will be any profits at all in the future.
Apart from the economic reality
Economists, investors, and analysts are shouting the loudest that stock market prices no longer reflect economic realities. The financial markets have become disconnected from the economy and seem to be taking their own course. There is said to be a lot of air on the prices. Shares are just as expensive again as they were at the time of the infamous internet air bubble of twenty years ago. The underlying message is clear. There is, just like back then, a heavy crash on the horizon.
But, is it? After all, the stock market is nothing less than a barometer of investors’ expectations of the near future. It is said that the stock market is six to twelve months ahead of the real economy. The stock market often turned out to be a better predictor of the economic future than all economists, strategists, and analysts combined. Think, for example, of the year 2009 when the stock market started to rise again while the gloom was trumpeting the economic malaise in which the world had ended up. Later, the gloomy predictions about the downturn in the economy turned out not to be true. The stock market was once again in favour of the consensus of experts.
And now what? Since March, the stock market has been recovering. Recently, 2.5 million new jobs were created in the United States where a loss of 8 million was expected. Retail sales increased by more than 17 percent, more than double the estimated increase. The number of mortgage applications rose sharply. The housing market continues to rise. The New York Empire Manufacturing Index rebounded. In the European Union, purchasing managers also turned out to be considerably better than expected this morning. Of course, the economy has been hit by month-long lockdowns. But perhaps we all overestimated this thump?
American professor Jeremy Siegel – a renowned optimist when it comes to the stock market – recently stated that if there is no serious second wave of coronation traps, it is not even out of the question that the market may reach another All-Time High this year. In his opinion, the large-scale support of central banks combined with the new risk-on mentality among investors will ensure a continuation of this rally. After all, more and more people are starting to realize that it is no longer possible to build up assets through a savings account.
Could this increased optimism lead to an exaggerated form of euphoria? Certainly. That danger is always lurking. But nice is the comparison with a similar situation in history: the outbreak of the Spanish flu in 1919. At first, the stock exchanges collapsed and then quickly returned to their old levels. Does it look familiar to you? Then the rally fell dead. The fair would move sideways for years before starting the infamous roaring twenties in which the fairs would once again rise to unprecedented heights. Something similar could happen again this time. First a surprisingly fast recovery. So fast that the growth has been realized for years.