R.Kavcic: “Why stock markets are up 44% amid the worst economic contraction in history.”

R.Kavcic: “Why stock markets are up 44% amid the worst economic contraction in history.”

The economy is in a ditch, and millions of Canadian workers still find themselves unemployed or underemployed compared with where things were before COVID-19. And still the stock market is posting some record gains.

“It’s surprising how quickly they came back,” Robert Kavcic, senior economist at the Bank of Montreal, said of the markets. In March, stocks crashed. They fell so steep and so far that many assumed it would take years to rebound. In the end, the stock market recovery took just 150 days. Since it bottomed out on March 23 of this year, the broadest marker of the U.S. stock market — the S&P 500 — is up 44 per cent. So, what gives?

It’s always important to remember that the stock market is not the economy. Stocks are meant to reflect the future value of a given company’s stock, not the state of Main Street today. Kavcic said the sharp rise in equities shows how the pandemic has hit different sizes of businesses in different ways. For the most part, the big fish are doing OK, but the little ones are hurting.

“If you look where most of the economic damage was, it was and still is in smaller businesses and Main Street-type businesses that don’t necessarily trade on the equity market,” Kavcic said. “You don’t have a hair salon or a restaurant trading on the Nasdaq.” And yet, he said, digital companies such as Netflix, Cisco and Microsoft have fared incredibly well. And those are the companies driving stock market gains.

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