What is it with share prices? We have a global economy savaged by the sharpest recession for almost 100 years. There is the possibility, if you believe the pessimists, that the coronavirus will return for a second, far worse spike in the winter. Governments have borrowed shedloads of money that will, one way or another, have to be paid back. And the world’s two largest economies, the US and China, are in a trade war with each other.
Yet equities on both sides of the Atlantic have bounded back up: the Nasdaq Composite index hit an all-time high during trading on Friday; the broader-based S&P500 has recovered about three-quarters of its loss this year; the DAX, the index of the top 30 German companies, has done pretty much the same; and while the FTSE100 has been a bit of a laggard, it is back two-thirds of the way from its peak.
Rarely has there been such a disconnect between economic commentators, most of whom are profoundly gloomy, and what the markets are doing. There are several possible explanations.
One is to point out that not all shares, or indeed all assets, have recovered. Bank shares have remained weak. HSBC, Europe’s largest bank and until recently the UK’s most valuable enterprise, is now valued at little more than half the level of early 2018. There are obvious reasons for that.
By contrast, AstraZeneca has now become the UK’s most valuable company, reflecting the re-rating of pharmaceuticals and its success in creating drugs for cancer treatment. If it wins the race to create a Covid-19 vaccine, expect a further upgrading. If reports are correct that it has approached its rival Gilead about a merger, and that goes ahead, then it will be a giant indeed.
If you look at other asset prices, there are similarly diverse outcomes. Top-end New York and London properties are being hammered by jitters about the future of great cities in a world where jobs become more dispersed. High-rise luxury New York seems particularly hard hit. Do you really want to live hundreds of feet above the ground when access to the elevator may be limited? On the other hand, country homes everywhere are seeing more demand. If people are to self-isolate, better to do so with a few acres around you.
Assuming that equities remain reasonably solid and head to new overall highs by the end of next year, then Covid-19 will have further widened the gulf between the ‘haves’ and the ‘have-nots’
In addition, there are always, at a time like this, people with cash looking for a bargain – and people who need need to sell quickly. This last point leads to a second part of the explanation, or at least the explanation for the volatility. When the markets crashed in March, there were some people who were either forced sellers or who simply panicked, but there were others who could see this was a once-in-a-decade opportunity to build up a position in solid companies, an opportunity that most investors get only two or three times in their life.
This is, of course, extraordinarily difficult to get right. America’s most experienced investor, Warren Buffett, did spot that equities were overvalued and built up cash. However, it seems he may subsequently have failed to grab the opportunity to plunge back into the market.
There is another thread to the argument about the pace of the recovery; it is that there is a lot of money around. We will learn on Wednesday whether the recovery in US jobs will lead the Federal Reserve to row back a bit on the scale on which it has pumped money into the economy, but its counterparts elsewhere, notably the European Central Bank, are keeping the taps open. If you print a lot of money, it has to go somewhere. Unless you are forced to by regulations, you are not going to put it into bond markets yielding less than inflation – and in the case of much of Europe, actually with a negative nominal rate.
For those sophisticated enough to have access to private equity investments, there are some other places to go, but smaller companies, like property, are illiquid. You can’t get your money back fast if you need to. So again and again, we come back to global equities as the asset of choice.
There is a further twist. No one knows whether all this money pumped into the system will end up creating inflation. It certainly doesn’t look like that now, but there must be some risk. Equities do give some sort of protection against that.
None of this means that there won’t be another share price crash. It would be great if we could predict that, but we can’t. Meanwhile, assuming that equities remain reasonably solid and – with bumps along the way, of course – head to new overall highs by the end of next year, then Covid-19 will have further widened the financial gulf between the “haves” and the “have-nots”.
If asset prices climb, those with assets will do best. Those without find it even harder to build up wealth – for example, by buying a home. Older people who have some savings will benefit; younger people who have yet to build up their savings won’t. A collapse in share prices undermines the economy in all sorts of ways, including crashing the value of pension funds. No one should welcome that. But we need to remember that financial inequality is corrosive and that there is a danger that the policies used to jack up the economy will increase the gap.