Why is the stock market going up?

We continue with empty stadiums, no tourists, no nightlife and no big events. Much of the activity is still in hibernation and we have not yet assessed the damage caused in the most affected sectors. However, the financial markets, led by the American stock market, are going from strength to strength. It seems as if everything is already arranged. Why have they recovered so quickly? In my opinion, three reasons coexist:

1. The most likely scenario is a progressive and rapid return to normality. The increase in the immunized population, either by vaccination or by having overcome the disease, will allow the restrictions to be lifted in the short term.

2. Less fear of other threats. The trade war, Brexit and the rise of populism are not so worrying anymore. It is when investors’ fear disappears, when prices rise faster in the markets, much more than when there is an economic boom.

3. Liquidity surplus in many areas. Thanks to the strong action of central banks, which have boosted the money supply by buying debt for an unprecedented volume, this crisis is being shallower than it should and will be shorter. However, while most of the companies continue to have a very bad time due to lack of financing and many will end up going bankrupt, there is the paradox that individuals have accumulated much more savings than they expected.

What does this last point imply? The increase in central bank liabilities has as a counterpart a greater asset in the hands of economic agents, which materializes in more liquidity in the hands of savers. As the latter see light at the end of the tunnel, they decide to consume and invest said savings. Higher consumption makes companies recover their income and the increase in investment is causing price increases of the assets in which they invest.

This makes us think that, mentally, the crisis is over. I say mentally because the restrictions, infections and deaths continue. In this situation, we must ask ourselves Who will bear the costs?

We have companies and the State much more indebted, which, courtesy of central banks, can pay back their debts in the very long term and with low or even negative interest rates. For public accounts, there is not much difference between central banks writing off their debt or having it perpetually renewed at zero rate. In this way, everything indicates that the cost of this crisis will end up being paid with more money in circulation, depreciating the value of the currency.

We find ourselves with an excess of money supply where nobody wants to keep paper money beyond what is operationally necessary; not those who trust in the economic recovery, nor those who are afraid that their money will lose value. This flight of currencies issued by central banks is transferred directly to financial markets, helping to increase the price of other liquid assetssuch as stocks or commodities.

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