Strange, that the world at large is enduring one its gloomiest periods in recent history while the stock market continues to soar away.
The S&P 100 and the S&P 500 have both hit record highs within the past week or two, while the NASDAQ 100 is also pushing new levels.
At the same time, the global economy continues to struggle under the strictures of the new world coronavirus order, and growth has gone negative in several major economies.
Strange? Or not so strange?
In these times, where strange is the default, it’s normality that looks unusual.
And actually, what’s happening right now is completely normal, providing you know which are the correct variables to factor in.
For a start, there’s the macroeconomic context. Yes, the global economy is in turmoil, but it’s not altogether negative. Chinese growth stumbled last year, but it didn’t cease. And US economic activity continues to recover from the initial shock it suffered in March.
The numbers are striking. Third quarter growth in the US economy hit an annualized 33.4%, the highest rate ever recorded, albeit it followed on from an equally startling annualized quarterly drop of just over 31%. A rollercoaster ride, yes, but with significant recovery already banked, and the coronavirus becoming an increasingly known quantity by the day, the bumps are likely to be less severe from here on in.
The damage has been huge, but patchy. US consumers have spent less on services and more on durable goods. Certain sectors of the economy have been decimated, others have boomed. And stimulus checks have worked on several levels.
Firstly, the money that has gone into the pockets of US consumers has trickled down into the US economy itself, as it was designed to do. Some of that cash has been spent on goods, and some on investments.
Some too has been diverted into savings, which are now hitting new levels too. But these savings can in turn be used by the banks in which they’re held to lend back out into the economy and help support new activity.
In this kind of environment, where the money comes essentially free, it’s hardly surprising activity is holding up, and that the spectre of the Great Depression, which continues to haunt economists and governments alike, is unlikely to make a personal appearance this time round. Or at least, not yet.
Because, although it’s so far so good for policy-makers, the real question is: what happens next?
Is there a Faustian price to be paid for all this high-living in times of crisis?
Some commentators are beginning to get nervous. JP Morgan, in a research note issued on 25 January 2021 asked “Is there a bubble forming?” and talked at some lengths about excess liquidity, a string of new IPOs and special acquisition vehicles.
And separately, an editorial in the New York times on the same day asked “Are stocks in a bubble?”
In these strange times where strangeness is normality, and normality is strange, the answer is yes and no. Asset prices are indeed inflated – but why wouldn’t they be when the world’s fiat currencies are locked in a death spiral of debasement? And if the US government sent you free money, wouldn’t you rush out and convert it into something that might be likely to hold its value as soon as possible?
These dynamics, along with the idiosyncrasies of the options market, are certainly applying significant upward pressure on valuations.
But remember, there’s two sides to every trade.
Imagine for a moment that the equities markets have held their value over the past five years, in spite of the complex adjustments imposed by trade wars and the coronavirus. If they have held their value, the question then becomes: relative to what? And the answer of course is the dollar, which has declined in value against all major asset classes, including but not exclusive to property, gold, other metals, food, and of course equities.
The only asset class against which the dollar hasn’t really declined is other currencies, and it’s against these that it’s usually measured.
But at some point the economies of scale and cheap labour generated by the outsourcing of manufacturing to China will dry up. And there’s only so much in savings that can be made by the efficient logistical offerings of Amazon.