Since I last wrote in this column on 31 March there has been tremendous change. The way we live, the way we work, the way we engage with each other and the way we think about the future. Some of the change has been good, much of it terrible, and there is plenty that we’re still not sure about.
Notably, the global health crisis has gotten a lot worse. The ‘official’ number of active COVID-19 cases globally has grown from around 640,000 to over 6 million. And the total number of people who have been infected has risen from around 863,000 to around 19 million.
The health crisis is still accelerating. The curve for case numbers remains exponential.
Global governments’ policy responses have been aimed at slowing the spread of Covid-19 to buy more time – so that the health sector is not overwhelmed, and in the hope that a vaccine(s) may be coming.
The draconian distancing measures necessary to implement this ‘slow-the-spread’ policy have wrought havoc on the global economy. In the first quarter the Euro Zone contracted by 3.6% and in the second it shrank a further 12%.
Similarly, the US economy shrank around 1.5% in the first quarter and around 9.5% in the second (the biggest quarterly contraction on record).
The global work force has been severely impacted with an estimated drop in working hours of around 5% in Q1 and a further 11% in Q2.
Some estimates suggest up to 300 million jobs have been lost worldwide this year, with young people being the hardest hit. The global unemployment rate among younger (under age 25) is sitting at around 20%.
Yet, since hitting its lows on 23 March the global stock market has staged a spectacular recovery. Since then, the MSCI World Index has risen some 45% to be only around 5% below its February highs.
This seemingly strange dichotomy of share markets rising while the global economy and the health crisis deteriorate, is contributing to widespread sentiment that share markets are out-of-step with the ‘real World’ and vulnerable to a correction.
The United States is perhaps the most extreme example with ‘Wall Street’ and ‘Main Street’ seemingly heading in opposite directions.
Recent months have seen the US become the Coronavirus epicenter of the World with daily new cases over 50,000, cumulative cases of 4.9 million and cumulative deaths of 160,000. And to make matters worse, the onslaught of Covid-19 has accelerated the fracturing of American society along political and social lines as the ‘black lives matter’ movement clashes with far-right groups and the Nation straps in for what looks set to be the most volatile US election in living memory.
Yet despite it all, the US stock market has been one of the strongest in the World, with the S&P 500 up around +2% CYTD.
The explanation for this seemingly impossible dichotomy may lie in these places:
- Tech has skewed the numbers.
- Government stimulus has supported prices.
- The correlation between markets and the economy is low in the short-term.
- The odds of a viable vaccine may be shortening.
We will explore each of these in turn. Continue to our next post to read on.