Paradox posed by US Financial Markets
First Published on April 20, 2020
No market situation has ever foxed us more!
US Equity markets (S&P 500 Index) is merely 15% below the peak levels that was hit after 11 year of largely one-way bull run.
As we pen this article, S&P 500 index has just broken out of the resistance zone of 2850 and technically looks to be headed higher.
This, despite the backdrop of “once in a century PANDEMIC”, where people have to hide in their homes, which will expectedly stall the real economy, is to say the least, perplexing!
To us, either there is quick medical solution in offing or Financial Market participants (in US) are naive.
A more detailed analysis of the situation follows:
Quite clearly, COVID 19, spreads faster in USA (as compared to India) and whenever they will try to open up, the number of cases will surge.
We are not sure if US is moving towards a policy option that lets everyone get infected and develop herd immunity. This may look foolish, if medical solution is found in the next 6 months. At the same time, what if the concept of herd immunity does not work, if virus mutates.
The more important point is that, even if the US Govt opens up, a sizeable proportion of the population may still want to stay at home, due to fear. Even those who go to office will prefer rushing back home. Not doing many things that they would have normally done.
As such, opening up the economy may still not restore economic activities fully.
Further, while US may have a few months of respite in the summer months, another wave of COVID 19 is likely to hit, as winter comes.
In absence of quick medical solution, we would not be surprised to see the US economy contract by 10% or even more.
We have a negative forecast for India too (5 to 10%), despite RBI, IMF etc, still forecasting that economy will grow by 1 to 2%.
We are also perplexed at the market participants in US, if they believe that pumping liquidity along with large fiscal stimulus can solve a REAL ISSUE, where people have to hide in their homes.
We also have to remember that USA debt to GDP ratio is close to 100%. Even though, USD is the reserve currency, there is a limit to the degree of fiscal deficit / monetization.
We have always respected the financial market participants in US markets with some of the smartest people around. That is why we keep getting back to the fact that either they are naive to ignore what is happening on the REAL ECONOMY front or they have an inkling of the medical solution coming soon!
