Why, when the world is experiencing its biggest economic crisis since World War 2, are stock markets soaring? Why the disconnect? There was a similar disconnect after the global financial crisis of 2008, when the financial markets recovered faster than the real economy.
In South Africa, consumer confidence has also plummeted. The First National Bank/Bureau for Economic Research Consumer Confidence Index, which has a range of -100 to 100, dropped from an already depressed -7 for the fourth quarter of 2019 to -33 for this year’s second quarter.
On the JSE, one company, Naspers, and its offshore subsidiary, Prosus, dominate the Alsi, making up over one-fifth of the local index. Naspers has also done well during the lockdown, thanks to its large holding, through Prosus, in Chinese tech giant Tencent.US analyst John Mauldin, in his weekly newsletter “Thoughts from the Frontline”, notes that the US economic recovery is not looking like a V, U or L, as suggested by economists with differing views, but like a K.
A better indicator than the Alsi of the real economy are the FTSE/JSE Small and Mid-Cap Indices. Whereas the Alsi has recovered almost completely from its March plunge, these indices have recovered by only about 30%.This is the most frequently stated reason for the disconnect. Not since World War 2 have governments doled out so much to prop up economies. One way is through quantitative easing which proved effective in overcoming the 2008 financial crisis.