Why Wall Street she smiled as the economy collapses?

Pourquoi Wall Street sourit-elle alors que l’économie s’effondre?

NEW YORK | The pandemic has knocked out the american economy, destroying brutally more than 20 million jobs and slaying the profits of firms. Yet, after a shot of mou in march, the New York stock Exchange has regained a form that is insolent.

Its index feature, the Dow Jones Industrial Average, has already picked up more than 30% since its lowest level in the 23 march, at the time of the panic gained the hospitals cope with the influx of serious cases of COVID-19, and where the u.s. States needed in the mess of cuts crippling businesses of all sizes.

The employment figures in the coming months or the results of the companies in the second quarter “will get worse”, but “Wall Street has their eyes fixed on the horizon,” says Sam Stovall, head of strategy of investment in CFRA.

In this regard, investors are encouraged by the gradual recovery of economic activity, as well as in Asia, in Europe and in some american States.

Even with a reduced capacity, the re-opening of the park Disneyland in Shanghai Monday has particularly marked the spirits.

In addition, the brokers of Wall Street “think that the figures are worse than expected on the economy will lead to even more aid from the Fed, the u.s. central bank, which has already injected thousands of billions of dollars to ensure that markets are functioning normally, says Mr. Stovall. The u.s. government has also paid astronomical amounts of money to try to mitigate the economic shock.

Especially, note the specialist, the investors expect a dynamic rebound in corporate profits as early as 2021.

And then where to place his money when the Fed has lowered its interest rates around 0 %? Buy the us debt on the market is not paying much at this time.

 

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Listed companies are also far from faithfully representing the real economy.

They are on average larger, older and more international than the private companies. They are probably more able to weather the storm without too much damage as the multitude of restaurants, shops and small businesses that have had to close their doors for several weeks.

A few stars of the technology, particularly benefit of telework, and of the time free of the confined, have also taken a huge part in indices: Microsoft, Apple, Amazon, Alphabet and Facebook are now counted for about 20 % of the S&P 500, the index that represents the 500 largest companies on Wall Street.

“Investors réallouent their money in favor of these companies” because they focus on the better margins and, “de facto, their weight is reinforced”, note Guilhem Savry, head of macroeconomic research at Unigestion.

Other shift, according to this specialist, “services are poorly represented in the financial markets,” even as “this area is very important in terms of jobs.”

More generally, even if it may seem “counter-intuitive”, “the long-term economic growth is not correlated to the returns on the investments on the stock market,” says Jay Ritter, who studies the link between these two variables for many years.

The chinese economy, for example, has seen its per capita income grow 9 % per year between 1993 and 2018, but total return on the shares listed in the stock Exchange to decline by 1.9% per year.

Conversely, the Stock market south african draws from decades investors through the payment of a high dividend as the growth per capita of the country is not mirobolante.

“Over the long term, what matters are the dividends and growth of earnings per share,” says Mr. Ritter.

In the short term, the reactions of the market can sometimes seem amazing.

The publication of a good employment report, for example, may create a hazard to the cues from Wall Street, because if the unemployment decreases, wages, and thus inflation, may increase.

This, argue the brokers, may encourage the central bank to raise interest rates and make borrowing more expensive for listed companies and the investors.

Finally, this is not because the stock Exchange climbs that all Americans enrich themselves cheerfully: according to a Fed study, a little more than half of them have actions, and these are especially concentrated in the hands of the richest 10 per cent.

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