Market UP, Economy DOWN – How come?

Okay, explain this one to me:

While over 20 million Americans were made unemployed in April 2020, the US Stock Market had its best month for decades – up 13% on the S&P 500.

And, in May 2020 yet more Americans were made redundant – we’re now up to 39 million new jobless – and yet the market is bouncing along, more up than down.

So how come?

There is a well-known cartoon – or series of cartoons – that has the same theme: the market is not the economy and the economy is not the market or some such. Okay, we get that, but when there is such a catastrophic loss of jobs, how can US stocks continue to hold or in some case rise significantly?

This mystery is further compounded by the fact that the US stocks are doing much better than the UK’s FTSE – the latter down 13% over the last year while the former only down 13% over the same period (Eurostoxx is worst of all down 26%).

Now take a look at the tech-heavy US Nasdaq. Tech firms among others are having a very good pandemic, if such a thing can be said. It is trading precisely where it started at the beginning of the year. In other words: no change.

There are some easy explanations for this.

The obvious thing is we are all ordering more online, whether it’s food and groceries, or all the other things we having been amusing ourselves with during this time of lockdown. This is great news for Amazon, very good news in fact – its share price up 25% in the year to date. And while we are ordering on line we are working from home. This is good news for Microsoft Teams and other such services – no surprise then to learn that Microsoft’s share price is up 13 per cent. Apple and the like with services such as music, TV, cloud storage and the app store are all growing strongly as well. And with little else to advertise on currently, any or all advertising budgets are moving on line too so that budgets are concentrating on Google and Facebook. So the pandemic is proving a bonanza for those platforms, with share prices correspondingly moving up.

Of the five firms I have just mentioned – Amazon, Microsoft, Apple, Google and Facebook – they have a net worth of more than $5 trillion. Together they have a market value of 21% of the S&P 500. Now, in short, this is why the US stock market is doing better than its European counterparts. The American market trading contains these tech giants whose net worth has only been enhanced by the current crisis. This makes the overall picture look much healthier than it is. In fact, all five companies look more powerful and more resilient than we could have imagined at the start of the current crisis. Companies such as these will come out of this period not only with more money, but with a seemingly bulletproof business plan and product. In light of that, the current 21% dominance of the S&P 500 looks modest today compared to where we are surely heading next.

But the market is not the economy and looking at these figures, made up of just a few major players, tells us the real reason why that is. The US stock market is made up – largely – of big players, while the US economy is made up – largely – of smaller enterprises. It is an obvious point to make but the larger the business the greater potential resilience to weather the present storm and the worse one coming. This resilience is less the case with those smaller firms struggling with poor cash flow or no cash flow at this time, and with less collateral to leverage funds from financial institutions.

Things are just as bad in Britain. According to the Office of National Statistics, the UK has over six million small businesses. They employ 16 million workers. That’s half the British private-sector total. They are made up of “one man bands” or family run firms, part of a local economy or part of a once lucrative gig economy, like so much of the creative sector around London.  However, it is here that the pandemic’s economic shock has hit most. And no time soon is this going to show on the FTSE, or anywhere else for that matter, other than in the local unemployment offices and the communities that such small firms service.

Of course in the category of small to medium businesses lie many entrepreneurs and their endeavours. Currently, this is the roughest time for maybe a decade or more to launch a business. But then as we know there is never a “good time.” All business ventures are predicated on some sort of risk. The difference now, I suppose, is that the risk just got that much bigger, but then so too did the opportunity.

If you are old enough to remember the last “correction”, and it was a brutal one back in 2008, you may also remember that the bottom of the stock market came around February 2009. Yet some investors back then saw that as an incredible opportunity to buy low priced shares right across American companies. Some analysts say that if you had bought “low” back then today the return on your money would be in the region of 300%.

Warren Buffett did just that, and made huge profits as a result.  Looking at the market today in America and elsewhere it is worth remembering his words speaking of that time, and later what it yielded him, namely: “Bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”