Thursday , January 28 2021

Why are stock markets doing so well when the economy is doing so badly?

DOWN’it is primarily a symbolic threshold, but it is indeed a historical record. The US Dow Jones stock index broke 30,000 points, which is the level never reached. In BelgiumThe contrast is striking: while the “business climate”, the confidence of business leaders deteriorates,The Bel20 index is the best month in its history in November – it has actually returned to its level at the end of February last year, i.e. to its pre-Covid level.

The time of stock markets is not the time of the economy

How is it that stock markets go up, up when the economic outlook is so bad? Stock prices actually have little to do with today’s economic reality.

Put simply, today’s company’s share price does not reflect the company’s economic health today. This stock price reflects the expectations of investors or speculators for future returns. And the main determinant of these hopes for future profits in the context of the health crisis – those that have driven stock markets in recent months are not company performance or prospects, but health curves, decisions to re-closure, decontamination, loose closure or the delivery of vaccines.

Hope to get back to normal

These elements are dominant because they also govern the political and economic reality. However, the announcements of vaccines or several vaccine candidates at this stage have followed each other for two weeks – Pfizer, Moderna, AstraZeneca – and these announcements are nourishing hope: a return to normal life, and therefore also for the life of the companies. A return to normalcy that would be – and it is indeed hope or optimism – synonymous with a return to profit.

►►► Also read: Coronavirus: is Belgium ready to meet the logistical challenge of vaccinating 70% of its population?

As Bernard Keppenne, chief economist at CBC Bank concludes, stock markets time is not economy time. “And it’s probably even clearer this year. During a period of incarceration in Europe and risk of partial confinement in the United States. Markets already have a much more distant horizon, with the arrival of the 2021 vaccine, which should enable economic recovery, so they already predict the results or prospects of companies.

Bankruptcies will grow

“If we take the example of Europe, we will find ourselves in a much more serious situation in terms of bankruptcies and unemployment in 2021 than in 2020. But stock markets are already predicting economic recovery. who creates significant discrepancy in relation to economic sentiment ”.

Moreover, the monetary policy of various central banks, which has been flooding the markets with liquidity for years – in industrial quantities, distorts the situation somewhat. This policy lowers interest rates, drives investors towards the stock markets – to the detriment of bond markets and, in a sense, “consumes” the stock markets.

The transition began in the United States

Another element that is developing today, in particular the Dow Jones in the United States, is precisely the American political situation of Bernard Keppenne: “Trump expresses his defeat without conviction, and the transformation process is underway, and that’s a good thing. And most of all, in Biden’s new team we have the nomination of Janet Yellen, former governor of the American Central Bank, who will become the treasury secretary in the Biden team, and this is also an extremely positive element for the markets, because it will rather have an attitude of supporting budget intervention “.

And this prospect of both a smooth political transition (or more fluid than initially feared) and an undoubtedly powerful fiscal stimulus in the United States is also perfectly good for the financial markets.

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