The Press

Mar­kets bet­ting on re­cov­ery

The global econ­omy is still in the grip of a crip­pling pan­demic, yet the Dow Jones in­dex has hit a new high. Jere­myWarner ex­plains what is driv­ing the op­ti­mism.

- Finance · Politics · Business · US Stock Markets · Americas Stock Markets · Stocks & Markets · Financial Markets · Joe Biden · United States of America · Donald Trump · Congress of the United States · Federal Reserve System · Janet Yellen · Elizabeth Warren · United Kingdom · S&P 500 · International Monetary Fund

To look at the per­for­mance of the bench­mark S&P 500 and Dow Jones In­dus­trial Av­er­age, both nudg­ing all­time highs, you wouldn’t be­lieve that we are still in the grip of an eco­nom­i­cally crip­pling pan­demic.

In many re­spects, things could scarcely look grim­mer, with in­fec­tions and hos­pi­tal­i­sa­tions back at lev­els not seen since last May and lock­down strate­gies pretty much uni­formly reim­posed al­most ev­ery­where.

But then it is not the present re­al­ity that the mar­kets are fo­cused on; rather it is the prospect of re­turn­ing nor­mal­ity, or even that of sun­lit up­lands just be­yond the next ridge. Re­cent events have brought that an­tic­i­pated fu­ture for­ward by some dis­tance.

The main pos­i­tive news here is of course vac­cines, which prom­ise an even­tual end to the cur­rent mad­ness of re­peated lock­down.

This thought alone seems to be putting some­thing of a spring in the step. With the fin­ish­ing line fi­nally within sight, con­sumers and busi­nesses are start­ing to feel more con­fi­dent again, not­with­stand­ing the present mis­ery.

But it is not just the prom­ise of vac­cines. De­vel­op­ments on the po­lit­i­cal front are also widely thought pos­i­tive, at least for as­set prices.

The elec­tion of Joe Bi­den as the next United States pres­i­dent presages a re­turn to rel­a­tive po­lit­i­cal sta­bil­ity and pre­dictabil­ity af­ter the chaos of the Trump years, to­gether with the prospect of amas­sive fis­cal stim­u­lus, as­sum­ing he can get it through Congress – a big if in view of likely grid­lock on Capi­tol Hill.

To this end, Bi­den has nom­i­nated a fel­low sep­tu­a­ge­nar­ian as his trea­sury sec­re­tary, the for­mer Fed­eral Re­serve chair Janet Yellen. Few know their stuff as well as Yellen; not only is she hugely well re­spected on the in­ter­na­tional stage – which gives fi­nan­cial mar­kets a de­gree of re­as­sur­ance – but much more im­por­tantly, she is not El­iz­a­beth War­ren, the left-wing fire­brand that some on the con­ser­va­tive Right thought Bi­den might pick in or­der to buy off his more pro­gres­sively minded wing.

In­stead we have the clas­sic safe pair of hands, and one, de­spite her hard­line views on fi­nan­cial reg­u­la­tion, that can seem­ingly be re­lied on to keep as­set prices sweet – a big spen­der, to be sure, but amore con­sid­ered and eco­nom­i­cally lit­er­ate one than the likes of War­ren would have made.

‘‘This is not a good time to have fis­cal pol­icy switch from be­ing ac­com­moda­tive to cre­at­ing a drag,’’ Yellen has said. ‘‘That’s what hap­pened [af­ter the fi­nan­cial cri­sis], and it re­tarded the re­cov­ery.’’

Yellen is an ul­tra-dove who fully buys into the ‘‘lower for longer’’ in­ter­est rate nar­ra­tive. She firmly be­lieves that low in­fla­tion has con­sid­er­ably re­duced the risks of ag­gres­sive fis­cal and mon­e­tary pol­icy ac­tion, and as she demon­strated while at the Fed, she doesn’t mind us­ing it. Whether she’s right or not, it’s what stock mar­kets like. Just keep pil­ing one stim­u­lus on top of another un­til full em­ploy­ment and de­cent lev­els of growth re­turn; worry about the con­se­quences later.

All this sug­gests that the sort of long-last­ing eco­nomic malaise we saw af­ter the fi­nan­cial cri­sis might be avoided this time around.

Think of today’s eco­nomic col­lapse as sim­ply en­forced time out, and there­fore less likely to in­flict per­ma­nent dam­age, rather than a mar­ket-im­posed cor­rec­tion in­cu­bated by years of ex­cess. Of course, the longer we re­main in sus­pended an­i­ma­tion, the more likely last­ing so-called ‘‘scar­ring’’ be­comes. Even with gov­ern­ment as­sis­tance, many firms can’t hang on for much longer.

Yet de­spite the dis­ap­pear­ance of some big house­hold names since the pan­demic be­gan, and the ef­fec­tive demise of many small re­tail­ers, over­all in­sol­vency rates al­most ev­ery­where have re­mained re­mark­ably low. That’s down partly to gov­ern­ment fi­nan­cial sup­port, partly to re­duced court and tax de­part­ment en­force­ment ac­tiv­ity, and partly to tem­po­rary re­stric­tions on the use of statu­tory de­mands and wind­ing-up pe­ti­tions.

It­might be ar­gued that there is there­fore a great wave of in­sol­ven­cies, held back by gov­ern­ment ac­tion, about to come crash­ing down on us. In such cir­cum­stances, the big rise in un­em­ploy­ment would iron­i­cally be dur­ing the re­cov­ery phase of the cri­sis, rather than its depths.

That ac­tu­ally would match the nor­mal pat­tern of a re­ces­sion, when firms – hav­ing weath­ered the worst of the storm – fi­nally recog­nise as the econ­omy comes back to life that they are no longer vi­able and throw in the towel.

In any case, there is a good primer in the In­ter­na­tional Mon­e­tary Fund’s lat­est World Eco­nomic Out­look on how the more op­ti­mistic sce­nario I amtry­ing to sug­gest might pan out. When writ­ing about the WEO, jour­nal­ists tend to fo­cus on its more alarm­ing, worst-case sce­nar­ios. Yet this time around, with the pos­i­tive news on vac­cines now coming thick and fast, the gen­er­ally ig­nored up­side al­ter­na­tive is be­gin­ning to look the more plau­si­ble one.

In this imag­ined fu­ture, the fight­back against Covid goes much bet­ter than once as­sumed, with the early roll­out of ef­fec­tive vac­cines and bet­ter treat­ments.

This will al­low the re­cov­ery in hos­pi­tal­ity, travel and other high­con­tact sec­tors most af­fected by so­cial dis­tanc­ing mea­sures to oc­cur rather more rapidly than pre­vi­ously thought.

As un­cer­tainty about fu­ture in­come prospects sub­side, con­sumers will start to spend more, there would be fewer bank­rupt­cies, less labour mar­ket dis­lo­ca­tion and less de­te­ri­o­ra­tion in the fis­cal po­si­tion. Bri­tain’s econ­omy, for ex­am­ple, could be back at pre-cri­sis lev­els by the end of next year at the lat­est.

But gov­ern­ment re­sponses will be cru­cial. If peo­ple think they are about to be hit by much higher taxes so as to re­build the pub­lic fi­nances, they’ll save more and spend less, and the play­ing field will tilt even fur­ther.

Ask Janet Yellen; this is not the mo­ment to be talk­ing about fis­cal dis­ci­pline, or even of even­tu­ally striv­ing for it. –

The elec­tion of Joe Bi­den ... presages a re­turn to rel­a­tive po­lit­i­cal sta­bil­ity

 ?? GETTY IMAGES ?? Well-re­spected for­mer Fed­eral Re­serve chair Janet Yellen is Joe Bi­den’s nom­i­na­tion for trea­sury sec­re­tary.
GETTY IMAGES Well-re­spected for­mer Fed­eral Re­serve chair Janet Yellen is Joe Bi­den’s nom­i­na­tion for trea­sury sec­re­tary.
 ?? AP ?? The Dow Jones In­dus­trial Av­er­age has climbed even higher since last week, pass­ing the 30,000 mark for the first time.
AP The Dow Jones In­dus­trial Av­er­age has climbed even higher since last week, pass­ing the 30,000 mark for the first time.
 ??  ?? Joe Bi­den
Joe Bi­den

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