The great free rise of financial markets

What is the reason for such a discrepancy between the performance of financial markets and the state of the underlying economy? In fact, the reasons are diverse.

The financial markets performed remarkably during the pandemic, apparently benefiting from the conjuncture - the same that, on the other hand, brought whole sectors of the economy to their knees.

After the sharp drops in February and March, during which the S & P500 lost more than 20%, the recovery came in April and what followed surprised even the most optimistic investors. Between April and August, the main index of the American stock exchange gained almost 27%. The volatility itself is extraordinary, but what is even more disconcerting is that these gains were recorded during what is perhaps the most serious economic crisis in memory. During the second quarter of 2020, the American economy contracted around 33%, the worst quarterly performance since these statistics are available, contrasting significantly with the dynamics experienced on the stock exchanges around the world.

So, what is the reason for such a discrepancy between the performance of financial markets and the state of the underlying economy? In fact, the reasons are diverse. At first, the Fed's decisive intervention in buying corporate debt, creating a kind of safety net, reassured the most frightened investors. Then, the conditions generated by the quarantines dictated that the vast majority of the population was confined to their homes, forced to depend on online service providers for their basic shopping, entertainment and communication needs. These restrictions were extremely favorable for technology companies, which ended up driving the general increase in shares, as their businesses grew and the respective valuations rose, with the prospect that many of the newly acquired consumption habits will persist even when if you return to normality. Finally, there was an unprecedented number of new retail investors who, closed at home, decided to get involved in the world of trading and, through online trading platforms, migrated to the financial markets. These inexperienced investors contributed significantly to the increase in transaction volumes and to the inflation of the values ​​of large companies such as Apple, Amazon, Tesla, among others.

For the technological sector, the stars have aligned themselves. Apple became the first company to be valued at $ 2 trillion, with the iPhone maker's market capitalization today worth more than the UK's top 100 companies (FTSE) combined. Tesla, despite not being a technology company strictly speaking, is also one of the big winners of the moment: its market value exceeds that of Volkswagen, Daimler-Benz, Honda, General Motors, Ferrari and FiatChrysler cumulatively. Even more impressive is the combined market value of the so-called FANGMAN (Facebook, Apple, Netflix, Google, Microsoft, Amazon and Nvidia), which totals 8,4 trillion dollars, equivalent to the annual GDP of Japan and Germany, respectively. third and fourth largest economies worldwide.

The behavior of stock markets in recent months may be the first glimpse of a new era dominated by technology and, I hope, of a shift towards a more sustainable way of life. The next few years will determine whether that is really the case. Winston Churchill once said, "Never waste a good crisis."


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