Do markets feel virus barks worse than it bites?

Stock markets have tumbled fast over the last month. While governments in the US, UK and Europe have taken time to get up to speed with the consequences of coronavirus, stock markets have been way ahead of the curve. The analogy I would use is that of a German Shepherd. The dog sleeps with its whole nervous system ready to react to any stimulus outside the home. Its owner sleeps without the capacity to react so fast. When the dog hears a rumble outside, it is up in a flash investigating. It barks to warn the owner that something is amiss. While it is barking and growling, the owner takes his time to come, too, getting dressed and putting his glasses and slippers on. Yes, the financial markets dog has barked early this time and the owners are catching up on what is going on.

Markets are built on fear and sentiment. The coronavirus spreading though Europe was making them very uneasy as no real plan was in place. They were right to be spooked – just look at Spain and Italy. Now that they have alerted everyone to the potential economic meltdown, governments have reacted. The UK has put in place historic stimulus packages, which when truly studied are seismic. The US has signed off a multi-trillion dollar package with more in the tank. By the way, two trillion dollars looks like this: $2,000,000,000,000. Not to be taken lightly. And Europe is being Europe. Slow and steady and maybe this week as the northern countries sniff at the sun-soaked southern neighbours, a stimulus package will spring forth. Of course, with conditions attached and lots of green deal stuff to keep the pressure on the environmental push forward. As all of this takes place, the markets are rebounding. Why?

Well, if we accept that markets are built on sentiment, then the future looks kind of rosy, despite thousands of poor souls dying. Western countries are on some form of lockdown. Top scientists are appearing on TV channels, not pulling any punches on the severity of this outbreak. Even President “Fake News” Trump is on board. Easter is now cancelled again, the churches will not be packed and New York state will not be quarantined from the rest of humanity. Americans have been told that two million of them could have died, but as a result of what Trump has done, maybe 100,000 to 200,000 only will pass away. And when we put all this together, it creates a form of “certainty” that money markets like. Hence, the bounce in stocks and equites and that weird asset, Bitcoin. The International Monetary Fund has also come to the party. With all of us being diligent, staying in and doing our bit, the IMF is betting on a recovery. In short, global recession for 2020, but a striking, strident bounce back in 2021. This is if, and only if, this all works and maybe even Johnson and Johnson produces a vaccine. But take a closer look at the fundamentals and the picture changes – this is the bit I don’t understand. Under normal conditions, big companies in the Dow Jones and FTSE post numbers that generate dividends. Stock markets like dividends. Our pensions like dividends. But, these dividends will not materialise. Just look at IAG – owner of BA, Easyjet, Boeing etc – nought emerging from these coffers anytime soon. No fundamentals then? So, why the market bounce? Especially if there is no “real” money coming into the system for what looks like this year.

I do not have a crystal ball, but it seems that all of this news is priced in already. All bets are off as it comes to the way the markets used to run. For now, they are simply glad to be alive and kicking with stimulus money in the pipeline. Yes, there will be jobs lost, old industries buried and big piles of national debt. New companies will fill the boots of the traditional FTSE 100 members. Life will move onwards and the markets will endure, it seems.

But, I’m not so sure. The optimism around 2021 is a financial chimera. In the meantime, it’s business “as usual” on Wall Street.

● Jim Duffy MBE, Create Special.

If there is no ‘real’ money coming in f orwh at looks like this year, why the market bounce?