Joy over coronavirus recovery has left markets bereft of all logic

Name: Japan’s economy gets US$1.1 trillion stimulus after coronavirus state of emergency ends
Uploaded: 2020-07-09T22:30:16.000Z
Duration: 1 min 11 s
Description: Japan’s economy gets US$1.1 trillion stimulus after coronavirus state of emergency ends

Global markets are not supported by economic fundamentals but by stories or narratives convincing investors that everything will be fine

While the future is likely to be better, investors must be wary that the market always has the last laugh

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An electronic board showing the Hang Seng Index outside a bank in Central on July 6. The dominance of narrative finance appears to have untethered markets from their traditional indicators. Photo: Sam Tsang

Richard Harris

Published: 6:30am, 10 Jul 2020Updated: 6:32am, 10 Jul 2020

I spoke to an experienced fund manager this week and asked him what he thought would happen in the markets during the next six months. He replied with the answer I would have given: “I have no idea. There are no indicators to rely on.”

The markets are currently celebrating a victory of hope over reality. The recovery surge is visible in economic indicators you would expect after a historic lockdown of half the world’s population for about half a year, and that makes investors feel better.

That’s good for stock market confidence but has led to an overreaction. The underlying reality is gloomy, and the impending shift of tens of millions of people around the world to being under- or unemployed once government handouts fade implies permanent economic damage.

Global markets are not supported by economic fundamentals but by stories or narratives convincing investors that everything will be fine. The indicators professional investors rely on, such as growth, earnings, trade and various value metrics, have been discarded or excused.

The first time I saw this happen was in Japan in 1989. There were a hundred sensible reasons Japanese shares should have been trading at a price to earnings ratio near 100 times, but they were just stories. Today, it is 24 – and that seems high.

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Japan’s economy gets US$1.1 trillion stimulus after coronavirus state of emergency ends

Those of us who battled through years of using rational economic theory are yesterday’s news. Prices have moved so far away from reality that our tools of analysis are obsolete. Markets are going up because they are going up. We need another tool to look at them.