3min read

Whatever it takes Covid-19 policy sees market surge on bad news

一个口号Covid-19危机吸引了勒ss publicity than certain others, despite its apparent roaring success.

‘Whatever it takes’ was not aimed at directly at saving lives, but at preserving the economy and the slogan has been (almost) too successful.

在3月中旬,联邦里ve chair, Jerome Powell, let it be known that the US central bank will do whatever it takes to keep the markets from going into freefall.

That was critical to what followed – a sustained stock market run, in the face of bad news heaped upon bad news. While appalling economic indicators have emerged, with many economists and politicians warning of the biggest downturn in 300 years or 90 years or 30 years, the markets have gone up and up.

In late February, the FTSE 100 had been standing at more than 7,000, but, by 12 March, it had crashed more than 24% over fears about Covid-19. Similar falls were seen on Wall Street as the Dow Jones average fell some 7,000 points.

It was Mr Powell’s reassurance that made all the difference. The Fed chair had begun by cutting interest rates – to less than zero. But he received a distinctly frosty market response. The US bank chief then sent a strong signal to the market that the US central bank would do whatever it takes. And he was soon followed by UK chancellor of the exchequer Rishi Sunak – with a massive injection of capital into the UK economy, as well as plans to protect jobs with the furlough scheme and shore up businesses with rescue loans.

Everyone was expecting unemployment to rise, and it did. But there was a very strong commitment from major players. In the US, Congress passed a$2 trillion economic stimuluspackage. The Fed started purchasing assets, including even junk bonds and ETFs. As a result, the market did not do what it had done in 2008, despite the bad news.

What followed was most unexpected. Investors rushed into the market, to such an extent that it started to get a little out of control. There was momentum that saw market rises, whatever the bad news.

The markets have crept up steadily ever since Mr Powell’s intervention. At the end of May, the FTSE reached more than 6,200, while the Dow Jones went over 25,000 points – on lockdown-easing news. On Monday June 8, the US stock marketrecoupedall of its lossesfor the year.

Another factor in the market optimism is that, although there are expected to be some closures as businesses cease trading, others will move into the vacated space. Some firms will fail but others will acquire their business, which will mean market concentration – which is good for profits. If they manage to survive, there could be higher profits for firms in future.

And while many industries have suffered a very negative effect, others have been boosted, particularly tech.

While government bail-outs cannot be open-ended, we are unlikely to be heading towards a Great Depression-style slowdown.

Although some of the figures may resemble the economy around the same time, we don’t have the same structural problems of the Great Depression. Europe was going into a slowdown, but this is an external shock and the recovery should be fast once treatments and vaccines are developed.

A version of this article was first published on theOxford Science Blog.