Booming stock markets do not reflect the grim economy--they are not ‘real’

The S&P 500 is up 8 percent in November so far, in Wall Street’s best two-week stretch since April when markets were rebounding from their plunge over fears of the pandemic’s economic impact. The US stock markets are unabashedly up, after a global pandemic, political turmoil, raging wildfires across the west coast, and protests/ riots throughout major US cities. There is also a second and third wave of the pandemic in the European Union, with several countries under lockdown.

So, one must ask, why is the stock market going up when the world seems to be going down?

In March of 2020, as COVID-19 began to ravage America and the rest of the world, the Federal Reserve launched the biggest response in history. The Fed issued emergency loans to banks and local governments to keep the credit markets flowing. Simultaneously, they slashed interest rates to near 0%, from close to 2.5% in 2019, effectively making access to capital “cheap”. Lastly, the Fed purchased debt in the form of treasuries and mortgage-backed securities, increasing their asset holdings from $4.16 trillion in February to over $7 trillion by September. Not only did this flood the American economy with liquidity, but the resulting historically low-interest rates on safe assets (10 year Treasury Note is 0.73%) left investors searching for higher yield, primarily in the stock market.

The continued good fortunes of a few big tech companies is a reality. The US stock market is very top-heavy, with just five tech giants - Alphabet, Amazon, Apple, Facebook, and Microsoft - accounting for more than a fifth of the S&P 500’s market value. An accommodating Fed printing money and keeping rates low is directing the plenty of cheap funds into the speculative activity of stock markets world-over, rather than boosting productive activities in the global economy. An almighty market pop that would arise from any news of a vaccine breakthrough is the joker in the pack.

On Tuesday, pharmaceutical company Pfizer and biotechnology company BioNTech jointly announced that one of its vaccines was found to be 90% effective in preventing COVID-19 in participants. And the bulls are on a rampage, ignoring the logistic challenges and the time & resources required to make the vaccine available in every nook and corner of the world. God knows when these vaccines in the making will control the raging pandemic. But any news of a vaccine breakthrough will make the raging bulls go out of control.

The Indian economy contracted by 23.9% in the April-June quarter of this fiscal year, the worst decline ever recorded since India started compiling GDP statistics on a quarterly basis in 1996. As per IMF’s projection, India’s real GDP growth is expected to contract 10.3 percent in 2020, which is the highest contraction among the 10 emerging economies. People are struggling to make ends meet.

There is a border stand-off on the two fronts both with China as well as Pakistan. The pandemic is in no-sight of a retreat. Unemployment and underemployment are all-pervasive. But any insignificant statistics of some green-shoots emerging in the economy (from a nadir) will make the bulls so ecstatic, that they push-up indices so high as if stock markets are in a make-believe world. Both NIFTY and Sensex are near all-time highs, while the economy is deep in the weeds. A new market record may seem strange when set against the human and economic devastation of the pandemic.

The stock market rally looks very unreal for several reasons. The second wave of coronavirus is hitting many countries hard. Stock markets seem to be underestimating how the pandemic will change behaviours permanently. Consumers might be afraid to go to crowded spaces. Companies may trade office space for remote strategies. Despite trillions of dollars in stimulus packages announced by many countries, many businesses won’t last after the shutdowns, especially small businesses. About a quarter of the labor force is unemployed. Many workers may not get their jobs back.

Stock markets are living in their ivory towers and are out of touch with the hard ‘realities of life.