This week saw the S&P500 rise to within 1% of its all-time high and it is now valued about 50% higher than its 10-year average, which is pretty expensive. Whether this is even remotely justified is open to debate but investors are optimistic that earnings will beat forecasts in Q3, as they always do, and they believe this will give stocks a further boost. No matter that those earnings are still expected to be down significantly(see earnings forecasts below), investors have written off 2020 and have priced in a substantial rebound next year as hopes for a vaccine underpin a return to ‘normality’(whatever that is).
Markets appear to be comfortable with a Biden win in the US election, if it happens, despite the threat of a more grown up approach to the economy and government funding that is likely to involve tax increases. The blindly optimistic nature of the stock market means it has mostly shrugged off the rapidly rising infection rate in many countries, especially in Europe but also in parts of the United States.
Even if the death rate from coronavirus remains relatively low, its victims are taking up space in hospitals – in France about 30% of hospitalised COVID victims are in intensive care –and more worryingly there is an increasing shortage of doctors and nurses because so many medical staff have themselves been infected.
An attempt this week to get my 80-year old mother a COVID test in the UK via the government website was repeatedly met with a message stating that no tests were currently available and that I should try again later. When trying to contact my mother’s doctor, I was greeted with the message that several members of the medical practice had tested positive and were self-isolating, which means they are short-staffed and therefore struggling to handle a high number of patients.
Health systems are beginning to creak even before the flu season begins properly and that is why we have seen a sharp rise in the number of people being asked to go into lockdown,as well as tighter restrictions on movement and mingling. The health crisisis far from being behind us and is having a growing impact on the running of the global economy. Whilst many stock markets are way below their pre-virus levels, the US market continues to stand out. We know it is being driven by day traders buying the big tech stocks but it continues to misrepresent the status of most American companies. This was brought home on Thursday when the jobless claims figures missed forecasts and showed a rise to 898,000 – up 53,000 on the previous week when they were supposed to be going down. Pre-pandemic they were running at about 200,000 per week so are still very high.
The US economy is far from being strong and healthy, despite the previously unthinkable amount of money that has been printed and handed out to its citizens. However, as Peter Schiff points out, it is this weakness that is driving the market higher. Tech stocks are seen as beneficiaries of the virus and the rest of the market is supported by the anticipation of another multi-trillion dollar stimulus package to combat the economic effects of the virus.
In other words, in American at least, the virus is now viewed as ‘constructive’ for stocks and the market is thriving on economic weakness. It is yet another example of how topsy-turvey financial markets have become since governments and central banks decided they should be manipulating them. Whether or not this is simply the new normal remains to be seen.
FILE PHOTO: Reuters