The contrast seems grotesque. A deadly pandemic has shut down the global economy and left millions of workers furloughed, fired, or stranded without gigs. The future for most businesses looks uncertain to dismal. Yet U.S. stock indices are near all-time highs, at giddy valuations comparable to the 2000 dot-com bubble and 1929.
Foreign Policy researched but could not find a moment in financial history that remotely resembles today—so we asked a panel of leading experts to help us make sense of the markets, and what their state tells us about the economy and society going forward.
Investors See the World Through Pre-Pandemic Lenses
by Diane Swonk, the chief economist at Grant Thornton.
It is hard to reconcile the rich pricing and resilience of the stock market with the devastation brought on by the pandemic. One reason for the dissonance is that the value of the major stock indices is determined by fewer firms—and is less reflective of overall economic conditions—than ever before. The indices are heavily weighted by technology firms, many of which are better positioned to weather and even benefit from the pandemic than companies in other industries.
The U.S. Federal Reserve’s aggressive actions to stop a credit market meltdown in March are indirectly providing support for stock prices. There are other reasons for U.S. equity market strength: Investors fleeing emerging markets see the S&P 500 Index as a safe haven, just as investors fled to the perceived safety of U.S. Treasury bonds during the 2008-2009 global financial crisis. This appears to reflect investors’ hopes that U.S. stocks won’t correct downward much, which could be a misplaced bet.
Perhaps most worrisome, many investors still see the world through pre-pandemic-tinted lenses. They take previous recessions as a benchmark and expect profits to rebound as in the past—and don’t see the much larger and longer-term challenges created by COVID-19, including our need to maintain social distancing in the future. They would be better served to view the world with clear eyes: Both the economy and corporate profits will be much smaller than before the pandemic and will remain that way for a long time.
Corporate bankruptcies and consolidation will likely accelerate, which could further derail the rosy scenarios. A little more humility and a little less hubris from Wall Street would be welcome given the magnitude of the devastation we are enduring now and are likely to grapple with for some time to come.
Nothing in Financial History Compares
by David Rosenberg, the president and chief economist of Rosenberg Research.
This is the mother of all liquidity-induced equity market rallies. Nothing in financial history compares. This is not about vaccine hopes, not about the…
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