The number of research pieces, investment articles or conference calls with global strategists, that I have either read or listened to over the past 2 weeks, all say pretty much the same thing but in different ways – that equity markets have priced in a recovery in 2021 that almost completely discounts the effects of COVID-19.
If we still hold to the premise of “efficient market theory”, then all information known of a stock or commodity and its probable future returns, is immediately reflected in the price. The reality of investments, whether it has a sound basis or not, is that the market price is the barometer by which we are all measured, irrespective of whether the basis for the price is rational or not.
In the US, it seems the FED will do anything to support asset prices, especially bonds and potentially equities. Last nights price action for the S&P 500 has the market now in positive territory for the year. COVID-19; what was that again?
In China, to ensure the continuance of the Communist Party of China reign, employment of the people is critical, so the CPC will do everything to ensure the people stay employed.
In Australia, property ownership and investment is a national obsession. Both State and Federal governments are concerned of a significant fall in property prices and the cascading impact this would have across the domestic economy.
In short, the rally in US equities on the lack of any genuine fundamental recovery in earnings reflects the level of risk investors are prepared to take in search of return given what fixed income investments currently offer. In Australia, does the same apply for property? The latest stimulus by the Morrison government, granting up to $25,000 to new home builds, certainly points to the importance the property market to the voting public. And while we are at it, did anyone see the recent PMI numbers out of China last week. Yes, the government has them back to work with the PMI showing the sharpest of “V “shaped recoveries of any economic statistic.
All this leaves us is with more questions than answers. We are all second guessing our investment mantra, from Warren Buffet to Stanley Druckenmiller, to try and make sense of the strongest 50-day rally in stock market history. Last month billionaire Druckenmiller said in an interview with the economic club of New York, that the stock markets risk reward profile was one of the “worst I’ve ever seen”, and he “discounted the Fed’s ability to save the economy.” One month later the S&P 500 is now some 40% off its lows and the impact of the enormous Fed stimulus $3trillion to date is largely reflected in the market cap appreciation of the S&P. The correlation is now greater than 90% between Fed stimulus and market cap increase in the S&P500.
The disconnect between Wall Street and Main Street has been an often-quoted fact that does not in anyway justify the cause. Whether or not Wall Street takes notice of Main street, remains a moot point, but the reality is that as a society we are now prepared and possibly accept significant government intervention in our daily lives as the norm. The pandemic and the subsequent recovery is expected to have some permanent impact on the jobs market.
Digitalisation and automation of work will accelerate, eroding demand for middle skilled jobs while increasing high skilled jobs. The share of services in the economy will continue to rise while the share of in-person services is expected to decline. Healthcare, education, retail and hospitality are all sectors that may experience a permanent decline.
This decline should be offset somewhat by the sudden dependence of so many on the ability to work remotely and our reliance on wifi & broadband which should see the further development and build of infrastructure in this space.
The shift from a US centric global economy to a more Asian/China global economy over the next ten years is certainly a trend that this writer expects to continue. China has learnt its humiliating lessons of closing its borders between 1842 to 1949, and cutting itself off to the rest of the world. Will the actions of President Trump allow the US to fall into a similar demise? The US needs China almost as much as China needs the US, but President Xi has put China on a path to increase its position of influence and importance in the global economy, with horizons more than 50 years. At present, the economic vision for the US extends as far as November 2020, a somewhat shorter time frame, which may end up being to the demise of the greatest economy in the last 100 years.
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