Covid-19: the strange miracle on Wall Street

Hello, Wall Street? Here the Earth! While the World Health Organization has warned that the Covid-19 may never disappear, that the ranks of the unemployed are growing at an unprecedented rate in the United States and that economists fear the advent of an unprecedented recession, the American stock market seems to be doing like a charm.

The S&P 500 index, which groups the 500 largest companies listed on the New York Stock Exchange, is up 26% from its lowest level on March 23, and was, Wednesday May 13, 4% above. of its course of a year ago, when no pandemic obscured the economic horizon. 

Historical precedents

The stock market has never been so expensive since 2000. The price of shares compared to the financial results of companies is, in fact, comparable to that of the era of the crazy stock market valuation of the Internet bubble.

Forbes speaks of a “miracle on Wall Street” (in reference to the 1947 film “Miracle on 34th Street”), while the New York Times implores readers to repeat over and over that “Wall Street is not the 'real economy'.

If this apparent market euphoria gives the impression that investors are disconnected from health and economic reality, such a phenomenon is not without historical precedent. "During other major crises, such as in 1929, in 1973 and also in 2008, there have always been phases of strong rebounds during periods of significant declines," recalls Frédéric Rollin, investment strategy advisor for the bank asset management Pictet AM, contacted by France 24. Each time, the financial players, after the initial panic, raised their heads, before falling back into depression until the end of the crisis.

Is the current optimism of investors only temporary? Not so sure. First, they were reassured by the unprecedented liquidity promises from central banks. “The financial markets have gone up because of the massive, very rapid and coordinated actions of central banks and governments. It only took them a few weeks to reach an agreement, whereas in 2008 it had taken months ”, underlines Frédéric Rollin. This opening of the financing tap gives hope that some of the companies in difficulty will be able to escape bankruptcy thanks to the generous and inexpensive loan policy.

V resumption

Then you have to keep spinning the money. “If they don't invest in stocks, where will asset managers turn? The alternative would be to place the funds in bonds, which currently have a yield close to zero and therefore remain less attractive, ”notes the Pictet AM adviser. 

But, above all, the financial players seem to have convinced themselves that this crisis is more the result of a mishap than a swath of funds threatening to undermine the foundations of the economic system. They perceive it “as a natural disaster that struck the world while the economy was still in relatively good health, which has nothing to do with the 2008 financial crisis, for example, which saw the entire banking system bend under the weight of the accumulation of bad debts ”, underlines Frédéric Rollin. This belief in an imminent return to normal results in the acceptance, in financial circles, of the idea that a scenario of recovery in “V” is possible - that is to say that the current deep recession will be offset by a rapid return to robust growth.

This conviction that the current economic slump is only an unfortunate parenthesis is much less popular outside financial circles. Between the policies which, like French President Emmanuel Macron, assure that the economic system of tomorrow will no longer be able to resemble that of yesterday, and the economists who bet on much more hesitant recovery trajectories, the mood is more gloomy.

A fragile ideal scenario

Frédéric Rollin finds, for his part, that "if the reaction of the financial markets is not absurd, investors may be a little too confident in a scenario that has many uncertainties". It is impossible to predict, for example, how careful consumers will be in spending after the crisis has passed. 

"Market players are also betting that there will be no second wave of containment," said the analyst. However, the new cases of Covid-19 identified in China in recent days and the increase in the number of infected people in Germany, which is just beginning to deconfinate its economy, prove that the epidemic can always recover from the virus.

Finally, Wall Street “perhaps does not sufficiently integrate the political risk”, recognizes Frédéric Rollin. With the presidential election approaching in the United States, he feared that the Republicans would play the anti-Chinese card thoroughly, while the Democrats could not afford to appear too conciliatory with a country whose image is greatly degraded during this health crisis. The risk is, therefore, that the Sino-American trade conflict will experience a second youth, preventing the world economy from starting on a solid foundation

For the moment, the financial markets have chosen to ignore all these grains of sand that could halt the fine mechanics of their ideal recovery scenario. But history has proven that a plan rarely goes without a hitch, in which case, warns Frédéric Rollin, there will be “a relapse”. It remains to be seen how severe it will be.

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