The Resiliency of Markets

October 10, 2020

Markets around the world continue to show amazing resiliency. There are stock markets, bond markets, fish markets, labor markets, collectible card markets, real estate markets . . . they are all pretty resilient. In such a scary time, celebration could be in order, but a bit of skepticism wouldn’t be a bad thing as well.

This blog has been a big fan of the ‘L’ shaped recovery, while markets have been betting on a ‘V’ shaped recovery. So far the markets have the lead. There is also the ‘K’ shaped recovery. Here are some definitions, but I have skipped posting a sample of headlines. Be assured, that the stock market is way ahead of the economy.

‘L’ shaped recovery – The economy stabilizes at a new lower level

‘V’ shaped recovery – The economy bounces back to prior levels

‘K’ shaped recovery – A portion of the economy (think wealthy, employed, asset rich) bounces back, while another portion (think low income, poor job prospects, few assets) can’t participate in the recovery.

A few charts might be helpful:

The S&P 500 – Weekly 2017-2020

Here we see that the S&P 500 has bounced nicely from every negative shock. Despite lower lows (on the shocks) the bounce backs have been higher too. It is instructive to know that this is highly, highly unusual behaviour.

One probable reason for that is the fiscal stimulus by governments. Not just in the US, but around the world. Here are some of the staggering numbers:

United States – The US has enacted a stimulus of about $2.3 trillion of direct spending. This has been matched by market support by the federal reserve where they have purchased another $3 trillion in assets to aid companies during the COVID crash in early 2020. The administration and congress are currently negotiating a further package valued at somewhere near $1.2-$2.3 trillion.

Canada – After initially promising $27 billion in direct aid and $55 billion to support businesses during COVID, the government has done substantially more. In total Canada’s deficit for 2020 will end up being around $328 billion dollars and $226 billion of that has been in the form of direct aid. The Bank of Canada has also been busy stabilizing markets by purchasing around $400 billion of securities to ensure market liquidity.

EU – Each country in the EU has historically been left to decide how to spend money, but in July, the EU parliament took a historic step and announced a 750 billion euro stimulus plan that was based on joint finances. It is to be distributed based on needs and while the number has come down a bit, it is also in addition to individual country support. The EU central bank has also boosted markets by purchasing about 1.8 trillion euros of securities (about $2 trillion)

Markets Down? Just Add Central Bank Cash

Perhaps the best way to show what is happening is the chart above. This shows the Wilshire 5000 Total Market. Essentially the value of all public companies in the US along with the Total Assets of the US Federal Reserve. In the last two market scares, the central bank has simply stepped in to buy billions of dollars (2008) and this time, trillions of dollars of securities to support the markets.

Put in other ways, the financial markets aren’t resilient, the voting public is resilient. Perhaps that is forced on them, however. Here is what unemployment looks like over roughly the same period of time.

Unemployment Claims- 2007 – 2020

Unemployed people know that rent and food are core principles, and when the economy is in difficulty, the big picture isn’t really all that important. Borrowing a few trillion to save the economy makes for a really good pitch. It makes for a resilient population, a thankful population frequently.

These aren’t the only resilient markets. Despite many hurdles food distribution has remained resilient in the face of difficulties with access to workers, the health of workers, transporting crops and more. Food shelves are relatively well stocked in the first world. Of course this isn’t true elsewhere and organizations like the World Food Program are helping those who are less fortunate get food. The Nobel committee awarded the World Food Program with the 2020 Nobel Peace Prize. Given that lack of food is a leading cause of war, it is a true insight to give the Peace Prize to an organization that is not only working to help people everyday, but whose work helps prevent war. Kudos.

Given the difficulties in the economy and employment, one of the most surprising markets is the Real Estate Market. The resiliency is baffling frankly. Prices for real estate around the world have held relatively constant. While there are stories of prices dropping rapidly (New York) or rising rapidly (anywhere not in a city centre), overall, prices in first world markets have been very resilient. One market indicator in the US is the Case-Schiller home price index and it remains very close to an all-time high. Likewise commercial real estate values have remained elevated.

US Home Prices 2001-2020
US Commercial Property Price Index (greenstreet.com)

It is impossible to NOT be amazed by the strength in these markets, but it would also be ridiculous to ignore the support that markets have received from governments.

The debate about how long that support lasts is a worthy debate. In the past week President Trump rejected any further negotiations on a new stimulus deal and the stock market tanked. A day later, he reversed course and the stock market roared higher. This is not definitive, but it is clear that without the ‘free’ money from government debt, the valuations are not sustainable.

How long will a new stimulus deal last? The last $2 trillion deal was announced in March and most benefits expired in September, meaning six months of support. In that case, a significant part of the economy was shut down. The next $2 billion might last until summer of 2021. It isn’t clear how the market will support itself by that time. There is plenty of evidence that the economy has been seriously harmed in almost every part of the world.

All of that support has been provided as a stopgap until businesses can get back to normal. Unfortunately the human cost is increasing and the virus continues to rage throughout the world.

While some politicians refuse to act decisively to stop the spread of the virus, the infection rates rise and populations are worn down with the fear and requisite seclusion. Early in the pandemic there was a belief that a bit of help would sustain the economy while the virus ran its course. There is now evidence that the virus will constrain economic activity for longer than originally thought. It is unlikely that the next stimulus deal will change the outcome for the vast majority of consumers who have been sidelined. Their financial situation is dire today and it will get progressively worse, even if that progress is slow.

Daily Cases of COVID-19 continue to rise on a worldwide basis

Markets continue to show dramatic resiliency, but the foundations of that resiliency are unsustainable and the outcome when the money runs out is very negative. While it is possible to highlight this over and over again, perhaps the words of Jerome Powell, the Chairman of the Federal Reserve, from his testimony on Monday, would supply the appropriate amount of gravitas.

“Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses,” Mr. Powell said. He also suggested that “the rapid initial gains from reopening may transition to a longer than expected slog back to full recovery as some segments struggle with the pandemic’s continued fallout.”

Given the number of people that were in difficulty prior to and during the pandemic, the fallout should be expected to be very difficult for an ever larger part of the population. What is not reflected here is that this dark outlook assumes things get back to normal soon.

Resilient markets may require more than stimulus if the virus continues to impact consumption of goods and services.

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