It seems counter-intuitive that North American financial markets have been on a tear for several months, in some cases setting all-time record highs – even as the COVID pandemic proves deadlier and longer-lasting than we all hoped for. In this commentary, originally published in the Toronto Star, Jim Stanford considers this “cognitive dissonance” between the exuberance of stock markets and the hardship of the real world.
Booming Financial Markets Belie Social Hardship
Canadians have confronted an avalanche of depressing news about the COVID-19 pandemic and accompanying recession: infections, deaths, job losses, bankruptcies. Amidst the doom and gloom, however, one light shines brightly. Even as fears of a second wave intensify, the stock market has been doing very nicely, thank you very much.
The S&P/TSX Composite index has soared 45% since hitting bottom on March 23. That represents about $1 trillion in new wealth (on paper, anyway), and offsets three-quarters of the market’s losses when the pandemic first hit. Other global markets show a similar pattern. America’s bellweather index, the S&P 500, is just 100 points shy of its pre-pandemic peak. The tech-heavy NASDAQ recovered its COVID losses fully by early June, and has since gone on to set a string of all-time record highs.
Of course, the markets remain volatile: they were relatively flat last week (catching their breath after earlier big gains), and there’s always a risk of another downturn. But after an initial, panicked sell-off, financial markets have advanced steadily since March. They have now regained most or all of the losses caused by the pandemic. Yet real-world society is still clearly in the grip of the virus.
This cognitive dissonance is particularly shocking in the U.S.: contagion is rampaging, and the government seems incapable of responding effectively. But America’s slide into dystopia hasn’t stopped Wall Street from partying like things have never been better. In Canada, too, the chasm between financial exuberance and real-world hardship is striking. Bay Street valuations suggest the pandemic’s damage has been 75% repaired. That’s downright bizarre, given the rebounding infections, 3 million job losses, and mega-deficits we still face in the real world.
How do we make sense of the markets’ rise, seemingly unconcerned by the continuing human and economic toll of the pandemic? Several factors are at play:
Speculative motives: Fluctuations in financial markets are driven more by changes in the moods of investors, than by conditions in the real economy. Traders aim to profit from the ups and downs of shares, options, and complex derivatives. Mass psychology is more important than economic reality in placing these bets.
Over-shooting: Because of their speculative nature, financial markets always overshoot. They fall too far on bad news (as traders profit from pessimism), and rise too far on good news (capitalizing on euphoria). Right now markets are climbing back from an initial COVID-inspired collapse (in February and March) that was too deep in the first place. But this subsequent recovery is equally unjustified. Expect more painful ‘corrections’ in the future.
Central bank bond-buying: For years global central banks have used quantitative easing (purchasing financial assets with newly-created money) to support spending in the real economy. This strategy is now being used in Canada, too. A predictable side-effect is rapid inflation in asset prices, including corporate stocks and bonds. In essence, the Bank of Canada is refilling Bay Street’s punch bowl with billions of dollars of invented money every week.
Actual profits: The real profits of companies are often irrelevant to stock market fluctuations. But they can spark initial movements in share prices that are then amplified by speculative greed. Some companies have profited richly from the pandemic: including tech giants like Amazon (whose revenues soared 26% in the first quarter alone), supermarket chains, and others. Their share prices have soared.
Financial headlines focus unduly on the daily mood swings of stock markets, but they should never be interpreted as a barometer of actual well-being. At best, stock markets are supposed to help companies raise new equity and invest real capital. At worst, they are glorified, tax-subsidized casinos. In neither case do they accurately mirror the real conditions faced by the economy and society.
But this latest divergence between the euphoria of the markets and the continuing catastrophe of the pandemic is galling. It should inspire us to dethrone the markets once and for all from their undeserved status as oracles of economic prosperity. Financiers may believe this is a great time to reflate their speculative balloon. But the rest of us still have too much to worry about. And our economic attention should remain squarely focused on defeating this virus, and putting the real economy back to work – not being distracted by the speculative ups and downs of paper markets.