- Howard Must and Daniele Palumbo
- Business Reporters, BBC
Millions of people lost their jobs or had to avail themselves of social assistance amid the confinements imposed in the world to reduce the spread of the covid-19 pandemic.
However, stock markets recovered from their deep declines in March.
The United States was the scene of the most surprising gains in 2020, with the Nasdaq Tech Indexes rising 42% and the S AP 500 Indexes rising 15%.
But the UK’s FTSE 100 indexeses, with its struggling oil companies, banks and airlines – all of which were hit by the pandemic – did not meet the same fate.
Although it closed the year down 14% compared to the start of 2020, it has seen a steady increase in recent months and received a recent boost after a trade deal between the UK and the European Union was reached and approved. Vaccines.
In Japan, stocks rallied when a vaccine was discovered, with the titles of pharmaceutical companies and gaming companies leading the way.
A part of the rise in markets is due to the way we measure their performance, and another part could be due to certain excessive enthusiasm, according to investors.
There is also the issue of the large amount of money central banks are creating, they say. And finally, there are a few small reasons for optimism.
One important aspect to keep in mind is that stock market prices are not limited to the here and now, says Sue Coffee, UK chief equity officer at fund management firm Schroders.
” Stock markets are looking forward, so they are a bit like driving a car: your eyes are on the horizon, instead of the pothole in front of you. “
Another essential element is that investors have confidence in the success of the various Vaccines that have been approved or are in development to bring economic growth and sales back to normal.
Cheap loans also play a role, which is a boon for businesses. And the effects of all the money created by central banks to reactivate economic activity.
The Bank of England alone plans to buy about $1.2 trillion of government and corporate bonds with new money, through quantitative easing, an unconventional monetary policy tool used by some central banks to increase the money supply.
And since March of last year, the United States Federal Reserve (equivalent to that country’s central bank) has bought more than $3 trillion of assets.
These purchases are part of an effort to keep loan costs low and provide liquidity.
” Money has gotten cheaper, and cheaper money increases the value of financial assets. That is what has been supporting the stock market globally,” explains Coffee.
The 5 giants
When we look at the performance of markets, we are usually looking at an indexeses, which is a group of companies.
That is why the growth, or not, of large companies has a greater effect on the value of the indexeses than the movements of smaller ones.
But lately, especially in the United States, the greatest have become very, very large.
This means that a good year for tech companies, whose profits have grown as more people work remotely, has masked a bad year for companies like airlines.
The Nasdaq, for example, has seen a big increase since the beginning of 2020. But only five companies ( Alphabet, which owns Google, Apple, Microsoft, Amazon and Facebook) have almost the same value as the remaining 95 together.
” If you look at the performance of the indexeses, you might think that the coronavirus has not really affected the US economy,” Coffee notes. ” And clearly that is not the case. So it is not necessarily representative.”
The dominance of a few large companies in an indexeses has coincided with the increase in so-called passive investment, where retirees, money managers, and speculators can buy a cheap mutual fund that tracks an indexeses.
Therefore, when investors buy these funds, they buy the stocks that are behind the funds and help drive their prices.
” What you can see over the last 10 years is an outflow of money from active funds to passive funds and that did not change with the pandemic,” says Johannes Petry, a postdoctoral researcher in financial markets at the University of Warwick.
Petry explains that the companies that monitor these indices, which define which companies participate in them and therefore which ones benefit when someone invests in an FTSE 100 fund or a Nasdaq fund, have increasing power in the market.
While many companies join or leave an indexeses due to its size, this does not always work the same way. That is why indexeses builder rules can make a company qualify or not to enter a group following other criteria.
For example, he says, electric carmaker Tesla, which entered the S AP 500 indexeses in December, is estimated to have generated an extra $100 billion in demand for its shares when mutual funds rushed to buy them.
The “Fear and Greed” indexeses
However, things could be poised for a stock market crash, according to analysis by Joe Saluzzi, a partner at investment firm Themis Trading.
” Every day there is a rebound and everyone shakes their heads,” he explains. While many investors think that markets cannot keep going up forever, it’s hard to know when a dip will come.
Saluzzi follows an indicator published by CNN called the Fear & Greed indexeses (indexeses of Fear and Greed). A month ago it reached 92, which indicates “extreme greed”, although it has since fallen.
” When I see that, it tells me that people are not really nervous and that they should be,” adds the investor.
Another indicator you observe is the ratio of bets that the market will go up compared to bets that it will go down. Recently, the up bets outweighed the short bets by the largest amount seen since 2012.
A big mistake people make, he says, is that because they see that prices are too high, they recognize that the time has come to get out, but they prefer to wait because they believe they can be smarter than the market.
Other experts think that there are some reasons for markets to continue to rise for a while, as is the case with Coffee
For example, many people who kept their jobs have spent much less in the last year and will be willing to increase their expenses when the conditions are met, he explains.
On the other hand, he adds, it is unlikely that governments will return to the austerity measures that were implemented in the wake of the last financial crisis.
But when markets tumble, it will be interesting to see how investors react, Saluzzi argues, especially younger ones who have primarily experienced a market that rises and recovers quickly. They are a small, but active part of the market.
” They have not been battle tested. They have not been in the markets that long,” he says. “It gets ugly fast”.
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Eddie is an Australian news reporter with over 9 years in the industry and has published on Forbes and tech crunch.