Why Mr. Market Ignores a World in Turmoil
By James Mackintosh
TV gameshows have demonstrated that humans are prepared to make fools of themselves when there is a chance of winning a big pile of cash. Instead of a fast-talking game show host we have Mr. Market, and the pile of cash is provided by the Federal Reserve rather than a production company. But human foolishness never changes.
Today’s question for the audience is: Why is the market rising even as U.S. cities burn, Hong Kong becomes a flashpoint in China relations with the West and the prospect of a second round of coronavirus infections remains real?
It is deeply uncomfortable to watch Wall Street party while Main Street emerges from lockdown into tear gas. The bullish story is that none of these problems matter nearly as much for stock prices as the good news for investors. Businesses are reopening while the Fed is providing unprecedented support and governments are subsidizing the economy to the tune of 11% of GDP in developed countries, Fitch Ratings calculates.
I can’t shake the image of a popular Twitter meme, a toy rabbit with a sign coming out of its head saying “nothing matters.” Is there really so much money sloshing around that the readying of troops for possible deployment in the U.S. capital can safely be ignored? Perhaps investors are getting carried away, focusing on the pile of cash rather than the real question. Time to phone a friend.
The fundamental answer is that it’s difficult to trade civil disorder. Riots don’t directly affect markets. People suffer, some private businesses are destroyed, a few days of trading are lost. But with few people shopping anyway because of Covid-19, it doesn’t make much financial difference to listed companies. There are no obvious stocks to sell purely because of the public unrest, which helps explain why the market as a whole tends to ignore it.
The indirect effects of the protests could be important but are hard to make out even with the benefit of hindsight. Martin Luther King’s peaceful protests and the racial violence of the 1960s clearly led to the civil rights laws of the era, which outlawed explicit racism in voting and housing. But any link between the unrest and the performance of the economy is tenuous at best. There is, thankfully, no market in human liberties.
Looting is bad for everyone, but there is no chance it will bring down American democracy.
The unrest and Donald Trump’s response have increased the chance of Joe Biden winning the presidency in November according to betting odds. But it is too early to be sure whether a message of “law and order” will help or hinder Mr. Trump in the polls. Aside from specific sectors, it’s also hard to know if the market as a whole would do worse from a president (Trump) threatening more tariffs, or a president (Biden) threatening more taxes. Higher taxes hurt more, but since they depend on Congress, investors might prefer to bet on gridlock.
Something similar goes for the international furor over China imposing a new security law on Hong Kong. We might look back at this as the turning point that ended the territory’s position as Asia’s financial capital, but we might well not. If the U.S. removes Hong Kong’s preferential trading position, as threatened, it would surely create major financial ructions. But ultimately Hong Kong is tiny, and whether Asian finance is based in a semiautonomous part of China or in Singapore, Tokyo or even Australia just doesn’t matter that much to investors elsewhere.
Meanwhile, there has been mixed news on the risks of a second round of infections as lockdowns end. Sporadic coronavirus outbreaks continue in South Korea despite a well-run test-and-trace system, while Israel has closed some schools again after infections spread; in many other countries the reopening has gone smoothly. Big rallies and widespread arrests raise the risk of a surge of infections in the U.S. both among protesters and police, but it will be weeks before we know.
My view is that it’s all true: The unrest is less important to markets than it is to Americans, while easy money boosts what might otherwise be small stock jumps. It is hard to accept that Wall Street can shrug off widely held concerns about police brutality and racism, but the market isn’t taking a moral position. At the same time, the risks of bad outcomes, political misjudgment or radical change are clearly higher than they were. The same goes for Hong Kong.
The market is probably ignoring incremental bad news because momentum has control. All those who missed the rally are buying in now that lockdown is easing, pushing up prices. The S&P 500 had its best-ever 50-day gain from the March lows to Wednesday. The prospect of a new high helps too: the Nasdaq-100 index dominated by big technology stocks briefly broke to a new high on Wednesday, while the S&P 500 is down only 3% this year (and less than 8% below its high).
The pink bunny says none of this, or anything else, matters. Just look at the Fed: Easy money makes up for a lot of lost earnings. But market momentum always breaks eventually.
SOURCE : WALL STREET JOURNAL