Blog

  Since its March 23 low, stock prices have gradually rebounded to record high levels on September 2. However, the pandemic isn’t over, and the recovery doesn’t hold up to the hype. Optimism and hope, far from the reality we face, have become the new cult of Wall Street, and the Fed could be blamed for it.  

  « The stock market’s rebound signals a V-shaped recovery, stronger than our competitors anywhere in the world, » President Donald Trump declared on August 13 at the White House press conference, proclaiming victory despite the Covid-19 pandemic recession. Mr. Trump often brags about the stock markets’ strong performance, frequently used as the primary yardstick of his country’s economic health. Since we assume that agents are well-informed and act rationally, they can predict the future economy and buy and sell according to the expectations. We could, therefore, imply that the prices indicate the state of future economy.

  However, economists and analysts have warned recently about the massive disconnect between the financial gurus from Wall Street and the ordinary people from Main Street. Although the economy is slowly recovering, the crisis is not over yet. Employment was better than expected in August, adding 1.4 million jobs to the market and lowering the unemployment rate to 8.4%, below the 10% mark. Yet the US has still lost more than 11 million jobs compared to February. According to Bloomberg, economists predict an expansion of 21% in Q3 Gross Domestic Product (GDP), but it is still far from offsetting the unprecedented 31.7% drop observed in Q2. Further, the economic damage of the pandemic is disproportionate. In the leisure sector, for example, employment is down 25%. So why is the stock market so optimistic? 

  On the one hand, with unprecedented aid generated by free money, the Federal Reserve (the Fed) has helped contain the catastrophe. As in the aftermath 2008 crisis, the Fed has been injecting cash into the financial system, a phenomenon often called « quantitative easing » by economists or « helicopter money » by journalists. In normal times, the Fed avoids printing new money and dumping free money as it leads to a rapid increase in prices (hyperinflation). But the combination of low-interest rates and Treasury bond-buying is the standard remedy for economic crises. However, this time, the Fed is stepping one step further by dropping even more cash by buying corporate bonds. Italy Goldstein, a finance professor at the University of Pennsylvania, argues that this massive stimulus package has helped investors pick up the stock prices as they rally to buy stock with the money dropped from the helicopter. 

  On the other hand, these massive stimulus programs have created a sense of overoptimism in the stock market. Investors are now expecting a V-shape recovery, or a rapid recovery mimicking the letter « V » on a graph, resulting from the vast inflow of cash.  However, evidence shows that the pandemic is far from being over, and it would take a lot of time to heal a crisis of this scale. The number of new daily cases has been decreasing since mid-July, but the average daily cases in the past week (on September 15, 2020) in the United States is still around 35,000 people (John Hopkins University). Dr. Anthony Fauci, one of the lead scientists of the Trump administration’s task force, insists that Americans’ lives would be disrupted until the end of 2021. Investors and analysts see the possibility of the early development of a vaccine – a silver bullet to normalcy – but Dr. Fauci warns that it would not be immediately available to the general public.   Some scientists worry that a safe and efficient vaccine would not be possible at all. Others fear a second wave of infections, as observed in Spain and France recently when temperatures fall. 

  Now looking at the big picture, the bad news doesn’t stop there. Although the price of Delta Airlines stocks is going up, the International Air Transportation Association (IATA) predicts that air traffic would not return to pre-pandemic levels before 2024. Although big tech companies such as Amazon and Apple are enjoying the stock rally, many large companies such as Hertz and Brook Brothers are filing for bankruptcies is increasing. An article from CNN Business reminds us that it is only the tip of an iceberg, as many small and medium enterprises (SMEs) do not have enough funds to file for bankruptcy. Moreover, the pandemic has widened economic inequality. Many blue-collar workers have lost jobs and income, while the spike in stock prices is benefiting the top 1% primarily since most of Wall Street belongs to this group. There have been efforts in Congress to pass a massive deal to help the unemployed and small businesses. Still, it is unlikely to be agreed before the November election due to partisan disagreements.  

  Overoptimism in the financial system can be dangerous because it might become a speculative bubble, a situation in which the asset prices’ predictions are inconsistent with the intrinsic value. On September 3, the stock prices indeed dropped, but more recently, the prices went up again, and it is most likely to continue increasing. If market prices go up despite the ugly reality, investors and financial institutions will suffer when it crashes. To avoid an additional crisis, Wall Street should come back to Main Street and listen to science. In other words, the stock market should calm down and stop worshiping the temple of easy money, assuming the fact that a sharp V-shaped recovery is just a mirage.