ActivTrades: The great markets melt-up

The statue of Sir Winston Churchill in London, UK.

The statue of Sir Winston Churchill in London, UK.

ActivTrades Weekly



The financial markets have been the outstanding performers during the pandemic, seemingly benefiting from conditions that otherwise brought entire sectors of the economy to their knees.

After the pronounced dips of February and March, during which the S&P500 lost more than 20 percent, the recovery ensued in April and what came next surprised even the most optimistic investors. Between April and August, the main American stock index gained almost 27 percent. The volatility in itself is extraordinary, but even more bewildering is that such gains have been recorded during what is perhaps the most serious economic downturn within living memory; during the second quarter of 2020 the American economy contracted by nearly 33 percent, the worst ever quarterly performance since such statistics are available and one that contrasts vividly with the dynamics experienced in stock exchanges all around the world.

So why such discrepancy, between the state of the underlying economy and the performance of the financial markets? There are several reasons for it: On an initial moment, the decisive intervention of the Fed, buying corporate debt and creating a safety net of sorts, that reassured spooked investors. Then, the conditions generated by the lockdowns dictated that large segments of the population were confined at home, forced to rely on online service providers for their basic shopping needs, entertainment and communication.

Such constraints were extremely beneficial for tech companies, who ended up propelling the generalised rise of stocks, as their business grew and valuations increased, with many of the newly acquired consumer behaviours expected to continue even once there is a return to normality.

Finally, there was an unprecedented number of new retail traders that, finding themselves confined at home, decided to dabble in trading and, using online trading platforms, flocked into the financial markets.

These new inexperienced traders contributed enormously to the increase in trading volumes and price inflation of household names, such as Apple, Amazon, Tesla and several others.

For the tech sector it was the moment when all the stars aligned; Apple became the first $2tn company in terms of market cap. The iPhone maker market capitalisation is today worth more than that of the top UK 100 (FTSE) companies put together.

Tesla, strictly speaking not a tech firm, is also one of the great winners of the moment: its stock market value surpasses that of Volkswagen, Daimler-Benz, Honda, General Motors, Ferrari and Fiat-Chrysler, all added together.

Even more impressive is the combined market value of the so-called FANGMAN (Facebook, Apple, Netflix, Google, Microsoft, Amazon and Nvidia), at $8.4tn it is worth as much as the combined annual GDP of Japan and Germany, respectively the world’s 3rd and 4th economies.

The behaviour of the stock market over the last few months may be the first glimpse of a new era, one which will be dominated by technology and, hopefully, a shift towards a more sustainable way of living.

The next few years will determine if that is indeed to be the case. As Winston Churchill once famously said, “Never let a good crisis go to waste”.


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