Why the coronavirus left stock markets shaken but not stirred in 2020

Despite talk of economic destruction, recession, job losses and business closures, most stock markets are likely to end the year on a positive note, buoyed by central bank asset purchases and government debt

3-MIN READ3-MIN

Traders at the New York Stock Exchange watch President Donald Trump's televised White House news conference on March 18. Trump’s relentless cheerleading for the stock market, taking full credit for its gains, has been a hallmark of his presidency. Photo: AP

Published: 3:30am, 11 Dec 2020Updated: 5:05am, 11 Dec 2020

The S&P 500 stock market index soared 29 per cent, the second-highest gain in 21 years. The MSCI World Index was up around 24 per cent, France’s CAC40 up 27 per cent, and the Shanghai Composite Index up 23 per cent. Although the British and Hong Kong governments scored own goals in the year, their stock markets were up 12.7 per cent and 9 per cent respectively.

This is not a review of the markets in 2020, but of 2019. This year has been dominated by talk of economic destruction, recession, job losses and business closures because of Covid-19 restrictions – and yet money has flooded into asset markets.

Over 50 years ago, the S&P500 index broke 100. It then took nearly 30 years to hit 1,000; another 16 years to reach 2,000 and just five more to breach 3,000 in July last year. With the S&P breaching 3,700 this week (up 14.5 per cent in the year to date), it could hit 4,000 in less than two years. Goldman Sachs is calling 4,300 and UBS 4,400 for the end of 2022; let the good times roll!

My predictions for 2020 were for a significant pullback, and I was right – at least in February and March when the market lost a tidy 20 per cent. What I did not fully appreciate, as an advocate of sound money, was the determination of allegedly responsible central banks and governments to create cash out of thin air by printing it.

Before the mini-recession of 2008-9, the US Federal Reserve’s balance sheet was a pathetic US$882 billion. It jumped to US$2.2 trillion to get us out of the global financial crisis and rose in leaps and bounds as every little slowdown was met by another big bazooka of cash. By the end of 2019, it was US$3.7 trillion. It is now US$7.2 trillion.

Federal Reserve chairman Jerome Powell attends an event at the central bank’s headquarters in Washington on October 4, 2019. The Fed now has US$7.2 trillion in assets on its balance sheet. Photo: Getty Images/AFP