The only thing that looks more insane than the US president is the US stock market. Before the open on Thursday, the S&P500 was trading higher than it was a year earlier, a time when the world looked very different to today. April was technically the best month for the US market since 1987, not what you would necessarily expect during the beginning of a severe recession. In fact, we have seen rather a lot of strange happenings recently:

–  each week, the announcement of millions more people joining the dole queue is greeted with a shrug of the shoulders by stock market investors,
–  the oil price went negative, meaning that oil producers would pay you to take it off their hands,
–  the same thing is happening at the Bank of Japan and the ECB where they are offering to pay people to borrow money from them,

–  retail stocks in America had their best month ever, despite many shops being closed,
–  US stocks became more expensive than at any time during the past two decades,
–  a surge in the number of Americans opening share trading accounts highlights how millennials are getting into day trading. This is not the kind of activity you’d normally see during a recession.

“Sometimes I’ve believed as many as six impossible things before breakfast,” said the Queen in Through the Looking Glass. Modern day investors seem to have adopted the same approach.
Part of the reason for the climb in the US market is the heavy weighting of the big tech stocks in the index. Facebook and Alphabet (Google) indicated that advertising revenues are holding up, in digital marketing at least, whilst Microsoft announced that its revenues had grown 15% in Q1, a remarkable feat under the circumstances. Amazon has experienced a huge boost to online sales thanks to lockdown.

The coronavirus has been good to those companies who make a living on the web, where computer viruses are less deadly than real world infections. If the FAANGs can hold up then so might the market, regardless of the fact that the vast majority of companies that make up the economy are suffering. But this would also be a first if advertising revenues and software sales didn’t take a big hit from shrinking business activity caused by the recession.

The market may also be ignoring predictions for a wave of corporate defaults. Certainly, central banks and governments are doing everything they can to prop up the bond market, offering to buy junk-rated bonds and guaranteeing loans to almost everyone. If this works then, despite record levels of leverage, asset prices could be artificially inflated permanently. Which leads us on to another question: if stocks never fall and companies never go bust, are financial markets fit for purpose?
One reason we have markets is so that we have price discovery i.e. we can determine the value of assets and therefore make judgements about potential risk and reward when buying and selling.

Currently, markets appear to be broken. Prices are heavily manipulated by aggressive accounting, corporate debt is increasingly being classified as ‘risk-free’ and interest rates at zero tell us nothing. Asset prices have become divorced from economic fundamentals, which makes investing in this kind of environment much harder and much riskier. The cure should not be more painful than the illness, says the Mad Hatter in Chief when talking about the lockdown. But what if the modern cure for a recession is destroying the ability of financial markets to function with any semblance of normality? Surely that is a very dangerous remedy.

Richard McCreery is an investment adviser with over 20 years experience, based in the South of France. www.rmwm.jimdo.comRegulated in France by the Association Nationale des Conseils Financiers (ANACOFI), registration N° E004136. ORIAS member 13000050