Project Description

April: economy from Venus, stocks from Mars

The World: Extreme Dichotomy

Terrible economic news are everywhere. Developed economies contracted in the first quarter at rates not seen since the global financial crisis, and in some countries – since World War II. Unemployment is rising, businesses are defaulting in droves, private demand is crashing, the threat of deflation is here once again. What’s worse is that these are the first drops in the terrible economic news stream, as the second quarter is expected to be worse than the first. At the same time, stock markets are recording a crazy rally with the largest monthly increases in decades, alongside the rally in bond markets and a recovery in a number of other financial markets.
The dichotomy between the real economy and the stock markets has not been so prominent since the global financial crisis, which culminated in the 11-year bull market that ended last March. We have all learned that “the stock market is not the economy”, but there is nothing like seeing for yourself. The relationship between stock market performance driven primarily by investor fluctuation between greed and fear, and real economic growth, is weak and sometimes disappearing. If one is trying to predict the economy according to a particular financial market behavior, it is better to choose the bond market for this; although the connection to the economic outlook has also been weakened by the heavy and destructive, even if necessary, intervention of the central banks.
The dichotomy between stock markets and the performance of economies is nothing new, it is just now overly conspicuous. Since the global financial crisis, we have had a number of difficult insights: for example, developed economies are far less stable and much more exposed to severe crises than we believed. In the past decade, the developed world has experienced a surge in debt, a decline in productivity, and a much lower economic performance than potential. At the time, market performance was excellent: since the trough of the global financial crisis at the end of February 2009, the global MSCI ACWI index has risen above 250%, and the US index S&P 500 has added almost 400%.
Obviously, what drove global growth over the past decade were the emerging markets, and what drove the stock markets was the cheap money flowing through them since the global financial crisis. The Corona crisis, it seems, is further increasing the dichotomy between markets and the economy: as it crashes, stocks leap, fueled by central banks and governments, which have recently entered the game of “money showers”. Can this continue? Yes; How long? Unknown, so everyone should consider his/her risks vs the odds.

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