The mystery of the booming stock market

It had been bugging me for a while. How can it be that, at the peak (so far) of the Corona virus pandemic, as we go into a deep recession, stock markets are in rude health?

There’s no doubting the seriousness of the recession. Any data you like will confirm that this will be the deepest economic downturn any of us has seen, dwarfing the 2008 slowdown, which was itself the worst since the Great Depression of the 1930s.

This chart shows data for the UK, but it’s the same elsewhere:

Makes you want to scribble ‘biff’, ‘kerpow’ or ‘whammo’ at Q1 2020.

And yet, after a short term blip, early in the pandemic, stock markets rapidly recovered to previous levels and, in some cases even posted record highs. I’m no economist, but surely, this is the opposite of what should be happening.

This is the weekly Dow Jones industrial average index performance from January to October 2020 (I know I’m mixing up US and UK data here, but the trends are the same):

Turns out I’m not the only person to have noticed. In October, McKinsey published a think piece entitled ‘Wall Street versus Main street: Why the Disconnect?’ dealing with exactly this inconsistency.

As they expressed it:

“In the middle of the deepest recession in memory, stock markets are reaching new highs. Why the disconnect?”

McKinsey’s analysis finds three points of explanation:

1.Investors are taking a long term view, so where there’s an underlying healthy business, they see that the investment prospects are still good once the recovery comes.

2. Stock markets, especially in the US disproportionately represent stocks like the tech giants, who are largely insulated against the worst effects of the pandemic.

3. Stock markets mostly represent big business, whereas it is smaller, unlisted companies who will be worst hit in the recession.

Hence they conclude, it is not to surprising that stock markets can do well while aggregate indicators like employment and GDP are severely depressed.

Sounds sensible, especially when we hear rumours of the massive financial gains made by a few billionaires during the pandemic.

On the other hand, I’m a little disturbed to observe quite how far the markets over-represent a few sectors – namely tech, finance and pharma. These three categories, according to McKinsey/Standard &Poor, make up 18% of the US economy, but nearly 60% of the market capitalisation of corporate America. As McKinsey summarises it, the market value of listed US companies, does not reflect the dynamics of the real economy.

Should it? Is it a problem if it doesn’t?

Either way, it helps explain why markets have a life of their own, seemingly independent of the real world of business.

Forbes Magazine goes even further, in a piece entitled This is why the stock market is rallying, while the economy tanks, concluding that stock markets are surprisingly healthy because they are simply predicting the recovery.

In their words, when the recovery comes, “the economy could grow very strongly ….. it could result in one of the fastest growth periods in US history”.

Are these commentators deluded?

Or are they simply optimists? (Nothing wrong with that.)

It does make you revisit the fundamental question – what is the stock market for?

When I studied economics, it was a marketplace, intended to raise money for businesses to grow, and in doing so, to extend ownership of those businesses to a wider group. Through supply and demand, the value of stocks would reflect the health of the businesses quoted and so, in aggregate, the health of the economy more broadly. But that was before the nature of the markets changed to focus on abstract investments like derivatives, futures and the opaque mysteries we now call ‘financial instruments’ with the resulting trend to speculative investments. Stock markets became casinos.

My instinct is to think more like The Guardian, where Larry Elliott explains the disconnect between the real and financial worlds thus:

The reason for that is simple. Financial markets were once seen primarily as places where businesses and governments could raise capital for productive investment. Over the years, the centre of gravity of western economies – and the US and the UK in particular – shifted from production to speculative finance, most of it debt-fuelled.

Should we be worried?

The reliance of pension funds, in particular, on the markets makes them one of those institution which has become worryingly ‘too big to fail’ ensuring they will be protected. Arguably, this in turn encourages reckless speculation, like that which created our previous worst ever recession in 2008.

So, yes, I’m worried. But the optimists are probably happier than me, so maybe I should be more like them.

Keep your communications single-minded please

I loved this opinion piece penned by Imogen West-Nights in the Guardian a little while ago:

Go to the pub, but don’t come into contact with other people. Only meet in groups of six, but also sit in a restaurant with 30 other diners. Go to your office, but don’t go by public transport. Listen to the scientists, except when we’re ignoring them. Relax. Under no circumstances should you relax.

It is sometimes difficult, in the face of such mixed messages from the government, to resist the urge to crescendo directly into a full-throated scream on getting out of bed in the morning.

The government has an unenviable job in dealing with coronavirus, as the situation changes from day to day, but other governments have undoubtedly done it better. According to a June YouGov poll of 27 countries, Britons had the second lowest level of confidence in their government’s handling of the pandemic.

First because it embodies the most basic but crucial rule of mass-communicating, namely ‘thou shalt be single minded’. In advertising agencies, the common analogy was to talk about catching tennis balls: if I throw six balls to you at once, you won’t catch any, but if I throw one, you stand a good chance of catching it.


Unfortunately, as succinctly demonstrated, Corona virus public-facing communications have been anything but single-minded.

I know my former colleagues in Government communications despair at the flakiness of current offerings. Analogies tend to be more often made with human body parts, especially those below the waist, hanging in a sack.

Secondly, and even more gratifyingly, because it represents the only occasion I have ever known where someone correctly used the term crescendo as a verb. Crescendo is not the peak you reach (that’s a forte or fortissimo) but the ascent to get there.

Crescendo | Definition of Crescendo by Merriam-Webster

For that, I will be eternally grateful to Ms West-Nights.

Is this ad moving or is it an outrage?

Take a look at this ad, created by the McCann for Unfinished Votes – a quirky but highly emotive project brought to us by the anti-gun lobby. It was brought to my attention by the researcher Graham Booth, a marketing commentators I respect highly.

Now, I looked at this ad and immediately thought a couple of things:

Great use of AI – among the best I’ve seen of its kind.

Great cause – I am the kind of liberal lefty type who supports gun control.

Great to see the people I support matching their more cynical and malevolent opponents in using smart and progressive techniques to get their message across. I often despair that it often seems the more decent and principled the cause, the more lumbering and naive the communications (I’m particularly thinking of Brexit here).

What I didn’t expect to see was a response ‘below the line’ full of vitriol from those rejecting the message, the cause and the technique.

A few examples from YouTube:

Beyond disgusting. Shame on these parents

This is messed up and you guys are deranged

This is disgusting and hits uncanny valley lows unlike anything I’ve ever seen before

One of, if not the, most disturbing, creepy and horrible videos i have ever seen

And so it goes on; there are pages of condemnation. And it doesn’t, on the face of it, appear to be written by the reactionary, pro-gun militants but by regular people, genuinely disturbed.

I usually reckon I can predict when there’s going to be a backlash to advertising, but this took me by surprise.

Years ago, we used to tell clients they should aim to achieve controversy – it was a good thing disguised as a bad thing – a catalyst to spark a conversation.

Is that what we have here?

Or is it genuinely creepy and ill-judged?

I’m in two minds about it now I’ve seen the outrage. Makes you think, as we used to say.