Are Markets Inversely Related to Covid-19?

The massive, unprecedented stimulus packages thrown at the markets over the last few months, literally trillions of dollars in America and the EU, have created an even more artificial market in all asset classes, than the previously dysfunctional bull run of 2012 to 2020.
Does this mean that a cure or vaccine for the Coronavirus, would result in a market crash, because all of the stimulus would be stopped?
Or will the Fed or the ECB simply keep printing money to drive these phantom markets?
Where is this going? Have we found a magic bullet for rich people, just keep printing money, then pass the bill to the patsy on average wages?

Good one!

Yesterday, progress was reported on two separate vaccines and the markets responded upwards. Ryanair was up 10% for example.

It's getting harder and harder to understand what is going on.

Brendan

Is it not a case like always that markets don't like uncertainty ? If there's a cure then there is no more lockdowns. Actually maybe I'm stating the obvious.

elcato said:

Is it not a case like always that markets don't like uncertainty ? If there's a cure then there is no more lockdowns. Actually maybe I'm stating the obvious.

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If there is a cure and the whole thing goes away, with everything reverting to normal, will that, actually, crash the markets because there will be great uncertainty. Suddenly, the whole stimulus programme could be removed, very quickly.
The markets would then have to value the equities, commodities, mortgage securities, all that stuff, without the massive stimulus provided by central banks. Are current valuations accurate? Or would they, necessarily, fall dramatically, as investors watched the real economy emerge from behind the screen of market manipulation by the Fed and the ECB?

There is a historic precedent for the current situation.

When the Spanish flu pandemic hit in 1917, the DOW fell by 33% over a couple of months. It fully recovered within a year.

It is estimated that the Spanish flu infected 500 million people worldwide, or about 27% of the world’s population and killed between 30 million and 50 million people.

It's interesting that the markets followed the same pattern on this occasion.

Sarenco said:

When the Spanish flu pandemic hit in 1917, the DOW fell by 33% over a couple of months. It fully recovered within a year.

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Did it not last two years rather than one ?

Sarenco said:

There is a historic precedent for the current situation.

When the Spanish flu pandemic hit in 1917, the DOW fell by 33% over a couple of months. It fully recovered within a year.

It is estimated that the Spanish flu infected 500 million people worldwide, or about 27% of the world’s population and killed between 30 million and 50 million people.

It's interesting that the markets followed the same pattern on this occasion.

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Not quite the same analogy, because the markets weren't dependent on state intervention.
The analyst in the article is suggesting that good news on the Coronavirus front ( a vaccine or a cure) will be bad news for the markets.
Likewise, bad news on Covid ( large second wave, more virulent strains) will be good news for the markets.

Allpartied said:

Not quite the same analogy, because the markets weren't dependent on state intervention.

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but state intervention is financed by central bank stimulus or money printing, where is ireland getting all that money at 0% ? what is ireland spending all that money on ? it is spending the vast majority of it on covid payments and wage subsidies. Therefore people are not losing their jobs because of lockdowns indeed many low paid workers were getting paid more . Therefore there is not a demand collapse in fact alot of people have more money now than they ever had before, irelands savings rates are at record levels, 2008 it is not.

joe sod said:

but state intervention is financed by central bank stimulus or money printing, where is ireland getting all that money at 0% ? what is ireland spending all that money on ? it is spending the vast majority of it on covid payments and wage subsidies. Therefore people are not losing their jobs because of lockdowns indeed many low paid workers were getting paid more . Therefore there is not a demand collapse in fact alot of people have more money now than they ever had before, irelands savings rates are at record levels, 2008 it is not.

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Not yet, but unless the rules of capitalism have been completely torn up, there is going to be a return loop recession.

Say the recovery is 90% and we get back to consuming at 90% of our pre-Covid levels, that's still the biggest recession in living memory and worse than 2008. There is little chance of consumers returning, quickly, to 90%. Do people feel safe, all of them, will they travel, will they buy. Most economists were forecasting a recession in 2021 anyway, before the Covid crisis hit. This crisis is not quite a Black Swan event, more like a laser guided missile which has hit the economy straight in the heart. Maybe, that's a good thing and we will reassess our economic system, but I doubt it. All the effort will be aimed at getting us back to " normal", but normal left town a long time ago.

Your argument is completely blown away by the attached chart; US retail sales (ex gas for obvious reasons) are back to previous levels and trending higher.

Gordon Gekko said:

Your argument is completely blown away by the attached chart; US retail sales (ex gas for obvious reasons) are back to previous levels and trending higher.

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Obviously , if there is no spending for three months, there is going to be a bounce. But for the sales level this year to reach the same as last year, the retail sales will have to trend well above normal for the rest of the year. As govt support ends, as redundancies mount, it is unlikely they will do that.
Plus the US is, currently, producing a record level of Covid positive cases, so there is another element, which is not measurable in dollar charts.

However, the post is really about the relationship between Covid and the markets. If Covid goes away and consumption resumes as normal, there may still be a crash. If governments stop providing free money to groups of investors, those investors will have to question the value of their investments. My reading is that they are grossly overvalued and there will be a crash. Of course, the threat of a crash might be enough to keep the money flowing, but whatever that is, it ain't capitalism and it ain't normal.

Allpartied said:

governments stop providing free money to groups of investors, those investors will have to question the value of their investments.

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Governments are not providing free money to investors, but they are providing free money to workers on furlough and aiding businesses to pay their workers while their businesses are locked down. Indeed governments have ordered publicly quoted companies to cut down on dividend payment to their investors, that is why many stocks especially in UK and Europe are still down significantly because dividend payments have been restricted. Governments are actually taking some money from investors to pay for all this.

joe sod said:

Governments are not providing free money to investors, but they are providing free money to workers on furlough and aiding businesses to pay their workers while their businesses are locked down. Indeed governments have ordered publicly quoted companies to cut down on dividend payment to their investors, that is why many stocks especially in UK and Europe are still down significantly because dividend payments have been restricted. Governments are actually taking some money from investors to pay for all this.

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Haven't the ECB bought billions of Euros worth of corporate debt at, virtually zero interest rates. That's free money for corporates. They are also buying mortgage securities, car loan securities, a range of investment securities, which allow investors to accumulate wealth for next to nothing, which they then use to inflate asset bubbles in equities, or property or commodities.
The emergency payments over the last few months were essential, to maintain economic and social stability. But, I guarantee, they will be the first element of government subsidy to cease, while the other corporate friendly handouts will continue or even expand.

"The Fed pumped in massive amounts of new money via very low-interest loans to banks and by directly buying corporate debt and U.S. government debt. In a collapsed economy with tens of millions of unemployed, little of that new money flowed into productive investments, rehiring workers, or enterprise expansions. Those did not offer attractive profits. Instead, the new money went where profits could still be made: the stock markets. "

Do you own US/ECB debt or corporate debt? Only other corporations own this debt, so the Fed or the ECB bought it off them,when no-one else wanted it. That's free money and no risk. Most of this money was used to inflate the stock market, which if it was a true reflection of private capital would be sitting some 50% below where it is now.

That's my point, if this stimulus ends, the bubble will burst. But, counter-intuitively, if Covid continues to spread, then the stimulus will continue to expand and markets may continue to surge.

Surely the point is that governments will only taper off the stimulus when normality starts to return?

Gordon Gekko said:

Surely the point is that governments will only taper off the stimulus when normality starts to return?

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So, the FTSE was at 6500 in May, 1999. That's 21 years ago.

Is that the normal you are talking about?

Even with massive govt stimulus, the stock market is like a boat with dozens of holes in it. You can keep bailing and bailing, but, unless you fix the holes, it's still going to sink.

Allpartied said:

So, the FTSE was at 6500 in May, 1999. That's 21 years ago.

Is that the normal you are talking about?

Even with massive govt stimulus, the stock market is like a boat with dozens of holes in it. You can keep bailing and bailing, but, unless you fix the holes, it's still going to sink.

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The FTSE is in no way representative of the world

Allpartied said:

So, the FTSE was at 6500 in May, 1999. That's 21 years ago.

Is that the normal you are talking about?

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and the european markets are still below the highs they reached in october 2007 The Vanguard european ETF (quoted in dollars ) was at $80 in 2007 now its at $53, (after the massive recovery from $37 at the march lows, Wow) now the performance looks a bit worse because its quoted in $ which has strengthened considerably since 2007. Therefore the only stock market that has performed strongly since then is the US and now its just confined to the US tech sector, Tesla is now valued at more than the entire global auto sector, go figure. Therefore making generalised statements that the "markets" are not responding to the real economy is not true. Maybe you can say that Tesla is divorced from reality but what about the rest of the global auto sector?