Thank Covid-19 For The Stock Market’s Current Performance

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The stock market crashed early in the Covid-19 pandemic onset. Then it recovered. For that, you can indirectly thank … Covid-19.

The dynamic might seem at least the foothills, if not the height, of irony. And possibly ridiculous. Virtually everyone knows that it’s a president that matters and drives the markets. You can see from the number who tried to credit Trump with how stocks did, or who have done the same with Obama.

But people are largely wrong. Presidents matter little to the stock market and the influence of one party or another is often the opposite of what one might think. Between 1933 to the present, the S&P 500 averaged 10.48% a year under Democratic presidents, according to results of an in-house analysis that John Hancock Investment Management shared with me in August. For Republicans, it was 6.34%.

That, too, is partly happenstance, with a big 18.2% average annual return under Bill Clinton that owed to a lack of overseas war or recession, as Robert Johnson, a professor of finance at Creighton University in Nebraska, told me during the summer. Providence dealt him a winning hand.

Presidents can try to rally others, but they don’t even control the budget; Congress does. Even decisions there can have less long-lasting impact than one might think. Even the tax cut passed in late 2017—which I’d credit to Paul Ryan and other GOP congressional officials, as Trump largely just signed the deal— had a short-lived effect.

All it did was provide extra profit that largely went into buying back shares to temporarily boost prices. But when the extra purchases stop, so does the market rise.

The most important driver of stock prices, according to Johnson, is monetary policy. What the Federal Reserve, Bank of Japan, European Central Bank, Bank of England, and others do. That includes dropping interest rates and purchasing bonds, which are both attempts to stimulate the economy.

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That they achieve that stated purpose is far from clear. For more than a decade, the banks tried to pull the world’s economies out of the funk started by the Great Recession of 2008 on, with some even pushing negative interest rates.

The tactics didn’t seem to work that well in getting people (most of whom had been hit hard and weren’t rescued along with large corporations) to increase their spending or for companies to turn up production. Why make more when you don’t have unmet demand?

What central bank policies have done is to fuel equity prices. Low interest rates mean low yields in bonds, money markets, and other fixed income investments. Investors seeking good return turn more to stocks. While there are a lot of shares, that number is finite. More money flooding into equities triggers a basic supply-and-demand dynamic, driving share prices upwards.

As economic conditions post collapse were almost back to where they were—an average because the gains, so much of which came from stocks, went to the top 10%—the pandemic arrived. It was an unusual circumstance that started as a demand crash, starting with shutdowns in one of China’s largest industrial centers that served 94% of the Fortune 500. That had a negative impact on manufacturing and sales everywhere else in the world. Companies slowed or closed operations, laying people off, and then the virus washed over Europe and the Americas, cities and eventually states restricted activity to create a fire break to stop transmission, and the U.S. had the biggest GDP plunge ever: 32.9%.

As economies crashed, the Federal Reserve and other banks went into overdrive. There were also trillions in fiscal stimulus from governments. But these same actions again pumped more money out and pushed up equities, particularly as U.S. interest rates bottomed out around zero.

The seemingly high growth in the third quarter was only partial recovery as businesses reopened, leaving the U.S. GDP about 10 percentage points short of where it had been early in 2020.

Normally there can be a disconnect between the economy and the stock market. But as most people in the country try to find their footing, stocks soared aloft.

For both the weak economy and the strong markets, you can thank Covid-19.