Are rising markets on another planet?

The world has gone to hell, yet stock markets around the globe are soaring back up close to pre-lockdown levels.

You might wonder if traders and investors in the financial markets are not living on a different planet from the rest of us after the pandemic prompted governments to  shut down their economies for months on end and millions of businesses to pull down the shutters.

Yet in the US, which has been hit hard by the double whammy of the virus and the most extreme social unrest it has seen for decades, stock market indexes are just a nudge off their historic highs.

In the UK, the FTSE 100 index has climbed 350 points this week and today finished up more than two percent at 6,480, not far off the recent high six months just ahead of the general election last December.

Sterling jumped to a three-month high against the dollar. The pound recorded its biggest weekly gain since the end of March, as the dollar weakened and the Bank of England played down the prospect of negative interest rates.

The pound has now gained 5% against the dollar since reaching a low of $1.2075 in mid-May after being depressed by the country’s debt rising to pay for the shut-down and the fear of negative interest rates being introduced.

So what’s changed? What is feeding this market euphoria after so many doom-laden forecasts predicting the end of the world as we know it, and the worst recession since the 1930s? How does the market rally in the face of race riots?

The best answer involves looking back to what John Maynard Keynes famously observed post-crash in the 1930s with the return of animal spirits, the phrase he coined to describe how emotional mindsets and confidence can drive, or indeed, hamper economic growth.

Those animal spirits were out in force today on Wall Street as investors piled into shares after much better jobs figures for May than had been expected, prompting the hope that recovery from the virus lockdown will be quicker than many had expected. Perhaps that recovery will be a V- shaped one, rather than the W or L so many had feared.

The markets certainly think so. The Nasdaq Composite is less than 1% away from a record high while the Dow Jones shot up another 700 points. The S&P 500 and Dow Jones indexes are now down about 6% and 9%, respectively, from their all-time highs.

The new data today from the US Labor Department showed non-farm payrolls rose by 2.509 million jobs in May after the catastrophic fall of 20.687 million in April. This leaves the unemployment rate falling to to 13.3% in May from 14.7% in April. Clearly, this led traders to calculate that peak unemployment may have been reached. Economists had predicted the official unemployment rate would climb to 19% in May, with up to 7.25 million U.S. jobs being in lost in May.

The unemployment numbers are a remarkable testimony to the resilience of the US economy, and particularly to its small businesses which many had feared would collapse.

No wonder traders were so euphoric. Commenting on the US markets, Ulas Akincilar, Head of Trading at the online trading platform, INFINOX, says: “Car crashes are supposed to be followed by whiplash, not wonders. The markets had expected the impact of Coronavirus to continue rippling through the US economy in May, shaking fragile sectors like tourism to breaking point.”

“And yet, against all predictions, the US jobs market has hit back. The headline figure – 2.5 million more Americans are in work now than were a month ago – is a triumph for President Trump and a turbocharger for the Dollar.”

Among the shares gaining most were those that had been hit the worst by the shut-down. Airlines and entertainment companies listed on exchanges across the US, UK and Europe were on the rise. Travel bans and quarantine rules are starting to ease in most countries.

The biggest boost to the Dow Jones index was shares in Boeing Co which gained 9.2% as investors believe air travel is on the way back. So did shares in American Airlines Group Inc and United Airlines as flights will be expanded next month.

Novavax Inc also got a boost, as the US Department of Defense said it would grant $60 to the vaccine maker to  help fund manufacturing of its COVID-19 vaccine candidate.

In the UK, shares in British Airways owner IAG and easy jet also rose at the prospect of routes being opened up to Mediterranean holiday hotspots.

After the latest ECB’s big bazooka, injecting yet more money into the eurozone, European markets were also on the rise with French and German stock market indices up 2% and 1.5%. European investors hope that consumer confidence is on the move and that people will start spending again.

And that is the main question. How quickly will consumers open up their wallets and start spending on goods other than basics? As we saw from Bank of England figures this week, consumers have been hoarding during lockdown, partly because they could not go out to restaurants or theatres to splash out. In April, we repaid a record £5 billion in credit card debt and £2.4 billion in personal loans.

By contrast, businesses are becoming highly indebted. Corporate borrowing over the lockdown period has soared to nearly £50 billion. These loans have been taken out just to cover fixed costs – a disturbing state of affairs. And there are still millions of Britons on furlough schemes, many of whom may lose their jobs as their employers emerge from lockdown and re-organise their businesses.

Whatever the markets might be saying, the pain is by no means over yet. And there’s another pertinent question, will consumers spend on the same things in the AC era as BC? There are already signs of changing taste, and changes in work behaviour. Sales of cars are down to 1950s levels, with demand for luxury cars falling through the floor.

Yet VW reports record inquiries for its California camper vans as people seek alternatives to air travel, preferring to be in charge of their own wheels and staycations. In the US, shares in Winnebago mobile homes are at new highs as holiday makers look for more secure ways to travel. At the same time, some of the country’s biggest employers are looking at offering staff the option to WFH – or indeed WFA (Work From Anywhere) – in the future. That means acres of empty property space, and thousands of satellite businesses that depend on them suffering.

Or is this all post-Covid rumination running riot in the imaginations of investors? Maybe once we feel safe enough to roam the streets freely again, we will slip back to the old normal quicker than seems possible now. We’ll see soon enough.