What’s Going On Out There?
Estimated Time To Read: 2 minute(s) 45 seconds
Covid-19 has brought about a global crisis. Some industries have been decimated, working habits have changed forever and there’s been an uptick in the number of people being treated for depression. How then can stock markets have risen to levels above where they were a year ago?
When you want to avoid reality, some people will take a drug of some sort to alter their reality. A bit like the miracle where water was turned into wine (a drug to alter reality), politicians globally have reached into their box of tricks and out of nowhere created money.
The first time they did this was after the 2008 crash when they created $787 billion. Back then we were worried; how would they pay this back?
In response to Covid-19, governments worldwide allocated $10 trillion for economic stimulus in just two months—and for some countries, their response as a percentage of GDP was nearly 10 times what it was in the financial crisis of 2008–09.
In the US, President Biden’s $1.9 trillion coronavirus relief package included a payment of $1,400 to every eligible taxpayer in the US. This followed a $900 billion relief bill passed by Congress in December, and more than $2.5 trillion of aid authorised during President Donald Trump’s final year in office.
In recent weeks, Biden has announced a desperately needed further $2 trillion infrastructure spend in the US. Both Obama and Trump also talked about fixing up the decaying infrastructure in the US that is in dire need of care, but nothing was done. This infrastructure spend will create jobs, giving work to industries that are on their knees. This plan has yet to make it through Washington, but markets react to news.
Since the announcement of a vaccine just after the US election, markets started to price in an economic recovery. Buoyed by massive stimulus packages and increased demand, markets have continued to rise.
An interesting change has taken place within the US market. The low-cost tracker (passive) funds continue to be the investment vehicle of choice, but many commentators are worried that a bubble is forming in this index, particularly around the eight major tech stocks that dominate it.
A large gap emerged over the past five years between the return from asset managers who invest in value stocks, which were then also those hardest hit by Covid-19. Up to November 2020, this gap was the highest ever recorded. Since then, the gap between value funds and the equity index has closed quickly, but it still exists today, while tracker funds have been sluggish by comparison over the same period.
Are there consequences to all these miracles?
The US economy and ultimately the dollar will be weakened by the creation of all of this ‘free money’. The race between China and the US is being lost by the US much faster as a result of Covid-19. How will they pay back this debt? They hope that the economy will thrive and as a result, they will collect more taxes, but they will inevitably have to increase taxes anyway. This will probably be a global phenomenon. Effectively, the US is hoping to inflate itself out of excessive levels of debt.
How is Veritas Wealth responding?
While acknowledging that we do not know what will happen next, we have gradually been increasing the allocation in our portfolios to value-style investing, which is actively searching out stocks that we believe the market is currently underestimating, in order to benefit from the global recovery and increasing inflation, while reducing exposure to expensive growth and technology stocks, particularly in the US.