Stock markets are telling us we’re saved, but history has a warning

 (Natasha Pszenicki)
(Natasha Pszenicki)

We’re saved. That, at least, is the message coming from stock markets around the world. Last week, the FTSE 100 — the share price index of leading British companies — rose through 7000 for the first time in over a year. Given that stock markets fell off a cliff last March as Covid-related investor panic took hold, the bounce over the past 13 months has been extraordinary. Over that period, the FTSE has risen 35 per cent, all the more impressive given that cash languishing on deposit at the bank pays you more or less nothing.

The FTSE’s gains pale into insignificance, however, compared with stock market action on the other side of the Atlantic. The S&P500 has risen a staggering 82 per cent over roughly the same period, largely because the US index is full of so-called “tech” stocks which, for the most part, have flourished during the pandemic. The top ten US companies ranked by market capitalisation include Apple (number 1), Amazon (number 3), Alphabet (known to you and me as Google, number 4) and — to prove that not all successful tech companies have to begin with the letter A — Tesla (number 6).

The apparent message on either side of the Atlantic — whether driven by technology or, in the UK’s case, by oil, commodity extraction and pharmaceuticals — is that the worst is behind us. Yet that conclusion is by no means universally true. While some companies have flourished, others have struggled. Despite recent “end of lockdown” gains, airline stocks remain very depressed. Shares in IAG, the parent company of British Airways, have halved in value since the onset of the pandemic. Airlines remind us that, even as lockdown is ending in the UK, we are still in lockdown vis-á-vis the rest of the world.

That’s partly a reflection of differing vaccine roll-out successes. Around 62 per cent of the British population have had at least one jab compared with only 24 per cent of the EU population. In India — the source of the latest “Covid mutant” threat — fewer than 9 per cent of a population of approaching 1.4 billion have any kind of vaccine protection.

For all our apparent success in the UK, therefore, the global picture is somewhat more discouraging. So why are stock markets so perky? First of all, investors try to be forward looking. They’re less interested in what has already happened and much more focused on what might transpire in the future. Vaccines offer an eventual escape from continuous lockdown and, as such, they point to rosier times ahead.

Second, President Biden’s Administration is willing to “splash the cash”. Biden’s team is confident that they can get away with a further $1.9 trillion “rescue package” over coming quarters with more infrastructure investment to come. Thanks to this stimulus, the IMF believes the US economy will be bigger in 2024 than it would have been in the absence of Covid-19, a remarkable recovery if true. Third, despite all this extra fiscal support, the Federal Reserve is promising to keep interest rates low until and unless inflation shifts above 2 per cent for an extended period. There is, apparently, no monetary punishment for fiscal profligacy. Investors love a combination of rapid growth and cheap money.

Fourth, whereas the Global Financial Crisis was associated with the idea that some banks were simply too big to fail, Covid has given the impression that “too big to fail” now applies across vast swathes of industry. Companies that perhaps would have failed — or be forced to shrink — in normal times have been placed on life support. For investors, the message has been clear: thanks to taxpayers’ money, it appears to be a case of “heads or tails, I don’t care: I still win”.

Gone is the idea of austerity. Money does apparently grow on trees. But can things really be this simple? Not necessarily. Stock markets may be enjoying some “end of lockdown” euphoria but, like heavily indebted governments, they also depend on the maintenance of very low borrowing costs. If the US economic rebound is really as strong as the IMF now projects, that assumption might be called into question. Sometimes, there can be too much in the way of good news. We know from history — most obviously in the months running up the 1929 Wall Street Crash and the bursting of the technology bubble in 2000 — that higher rates really do have the capacity to shock. It’s a warning to those investors who persuade themselves that stock markets really are one-ways bets.

Stephen King is HSBC’s Senior Economic Adviser and author of Grave New World

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