A friend wrote recently asking if I could explain why the stock market continues to thrive in spite of all the apocalyptic events unfolding in the U.S. on an hourly basis: more than 200,000 deaths from COVID-19, millions still unemployed, more than 100,000 small businesses permanently shuttered. Not to mention continued unrest in protest of police killings of African Americans, and a president who openly encourages violence and refuses to commit to an orderly succession should he lose the most divisive election of at least the last 100 years.
I've scratched my head over the same question for a while now. I was somewhat surprised by how quickly the markets snapped back after the crash in the spring, and I remain curious about how the Dow, NASDAQ, and S&P still flirt with record highs. Most of us know these indices don’t necessarily reflect a fundamentally strong economy, despite President Trump’s tendency to answer almost any question on any topic with “Look, over there, the NASDAQ.”
My friend, a knowledgeable journalist, wasn’t coming to me for a technical answer, but rather, I think, an opinion. So here’s what I wrote back.
It starts with near zero interest rates and the promise of those for the foreseeable future. Where else is all that institutional money going to go? Bonds pay nothing. Commercial real estate is stressed to the extreme and faces a very uncertain future. Rule one: Low interest rates almost always drive the market upward regardless of other circumstances.
Commodity prices are so low now that it's much like interest rates. The price of oil is somewhere near $40 or below, which is disastrous not only for the oil companies but also countries heavily dependent on petroleum exports (like, say, Russia). Thus you have the wacky spectacle of video conferencing company Zoom (ZM) boasting a market cap similar to Exxon (XOM). Which reminds me of back when a company like AOL could buy a company like Time Warner. (Oh, the horror!) Such asymmetrical anomalies rarely end well, by the way, but they do fuel the stock market.
The market gains are mostly propelled by five or six stocks: Amazon (AMZN), Alphabet (GOOG, GOOGL), Apple (AAPL), Facebook (FB), and Wal-Mart (WMT). So it's not like there's a robust vitality across the market. It's a giant tech company play, which reflects more about how the country is living its life during the pandemic than it does the overall health of the country or its underlying economy.
Frothy markets usually produce some subset of amateur investors who become intoxicated with high risk/high gain. The dot-com boom at the turn of the century spawned the basement day traders. The pandemic has given us the so-called Robinhood investors, sidelined sports betting addicts who now are driving up the price of risky stocks and, so far, beating the market (which is almost certain to beat them on the way down).
Because the stock market supposedly reflects expectations of future earnings, it's reasonable to assume that some resolution of Covid-19 (a real vaccine) will drive current earnings up. And that could happen in 6-12 months. Obviously, there's some rationale to betting on that.
In spite of the modern record number of people out of work, the jobs numbers are better than what most people expected. It's true that in good times robust employment numbers often send the market down because of pressure on labor costs etc., but I think in this case it's the absence of a looming total depression that gives investors some wind in their sails.
As for Trump and the chaos he continues to wreak, you always have to remember that the stock markets are absolutely amoral. They are only interested in return. So the prospect of Trump abolishing democratic norms and establishing himself as a bona fide autocrat would be just fine with Mr. Market. But only as long as he kept corporate tax rates unreasonably low, continued his enabling of short-term profiteering through the freedom to pollute and endanger low-paid workers, and has the bottomless balance sheet of the Fed available to fund rampant government spending in the private sector (no matter how corrupt).
One matter still puzzling me is the new-found tolerance in the financial class for these gargantuan budget deficits we're running up. I'm not sure how or why that has become a non-factor when not long ago it was the sine qua non for prominent Wall Street Republicans and economists. I think former Republican political operative Stuart Stevens has it right in his book "It Was All a Lie."
John Huey is a longtime journalist, who worked as a reporter for The Wall Street Journal, editor of Fortune Magazine, and editor-in-chief of Time Inc.