Wealth Management: Strategy blog – Only connect…
Strategy team - Kevin Gardiner (Wealth Management)
Economic data are diving, stocks have been climbing: what's going on? Is this another instance of finance being completely disconnected from the real world?
Not necessarily. The economic news tells us about the past, while markets are supposed to reflect expectations of the future.
The sensational falls in output and spending, and the surges in US unemployment - for once the superlatives are warranted - show that the major developed economies were contracting sharply between February and May. But contagion rates were slowing from late March, and lockdowns started to ease in April: economies have probably started to rebound.
Sub-editors and economists know this, but the data have been so dramatic, and the uncertainties surrounding the pace of revival so big, that they have concentrated on the fall, not the likely reversal.
Just two weeks ago, there was much talk of the UK "facing" or being "headed for" a major recession because output fell sharply in March. In real time, even as the headlines were being posted, the economy may have been growing again.
This doesn't mean we have left recession: that might require that the economy regains its earlier peak, and we are a long way - in distance and time - from that. But for forward-looking markets, this may matter less than the simple fact of growth resuming, and the expectation of stabilising and rebounding earnings that it fosters. Especially when that rebound in growth seems likely to be accompanied by even lower levels of interest rates, and expanded fiscal support too, for some time to come.
Remember, the stock market fell dramatically as soon as the scale of Western lockdowns became clear. On 23 March, the global market had fallen by a third from its high - even as the published economic data remained fine.
We would not be at all surprised to see resumed volatility after such a bounce, particularly if contagion rates pick up again. And of course, nobody knows exactly why stock prices fluctuate as they do in the short term. But for stocks to rebound even as economists respond to a shrinking economy is not evidence of indifference on the part of financial markets - a one-quarter slump in annual profits clearly matters - but likely tells us that they are trying to look forward, not back. Globally, the market is still about one-sixth below its February high.
And that future horizon can be pretty lengthy: so much so, that in a textbook world, losing even a full year of earnings now might eliminate just a few percentage points of stock market value.
The title of today's post is the epigraph to Howard's End, and is often quoted in the context of poor communication and crossed wires. Ironically (aptly?) Forster doesn't seem to use it that way
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