How can global sharemarkets soar when our economy is stuffed?
Millions jobless, the largest quarterly GDP decline since the Great Depression, and countries going further into multi-generational debt, yet global share markets have risen to record highs and show no signs of slowing down.
How is that even possible?
This is the great disconnect between the economy and the stock market.
The S&P 500 fell more than 30% in March 2020, yet over the last few nights has risen to all-time highs – a rebound like no other.
As negative news spreads like the word recession, equity markets decline as investors in some cases panic sell. Typically, over the short term this is an overreaction as savvy investors see opportunities before the rebound.
As we know, the pandemic threw countries across the world into lockdown, which curtailed our freedoms and took away the things we normally do on a daily basis, and often take for granted. But how did this make the share market go up? It seems nonsensical.
Amazon, Apple, Microsoft, Google (Alphabet) and Facebook constitute about 30% of the S&P 500 index, the highest concentration in about 40 years. Under pandemic conditions, investors globally speculated that COVID would lead to a rise in employees working from home, as well as shopping and streaming online. As a result, Amazon shares surged 68% in 2020, with Microsoft and Facebook jumping more than 30%.
With bank deposit rates in most countries hovering around 0%, people still needed somewhere to park their cash, as well as the stimulus money they were receiving from governments. A lot of that went into global share markets.
Many of the above-mentioned tech stocks were the landing pad for this cash, and have outperformed traditional slower growth industries like industrial stocks, financial services, oil and gas, and travel related stocks.
Overall, the pandemic has forced us to stay home and accelerated our digital needs, rallying those stocks and sending markets higher, despite the flailing economies.