2020 Has Been a Great Year for Stocks and a Bear Market for Humans
(Bloomberg Businessweek) -- The stock market was on fire in 2020, with the Dow Jones Industrial Average poised to end the year above 30,000, a record. Meanwhile, 30,000 people in the U.S. died of the coronavirus in just the past two weeks.
Shares of smaller public companies have caught up to the blue chips lately, with the Russell 2000 Index up almost 17% so far this year. Meanwhile, the number of small businesses operating in the U.S. has plunged 25%, according to a Harvard tracker.
Tesla Inc. Chief Executive Officer Elon Musk’s wealth increased by an estimated $140 billion this year thanks to the stock market, while a combined $100 billion was added to the fortunes of Amazon.com Inc.’s Jeff Bezos and Facebook Inc.’s Mark Zuckerberg. Meanwhile, the estimated number of American adults who don’t have enough to eat has risen to some 27 million.
“The stock market is not the economy” is a common refrain on Wall Street when it comes to explaining away apparent disconnects. Rarely, if ever, has the axiom been trotted out as much as it was in 2020, amid the unsettling contrast between superlatives of prosperity and hardship. As casualties of the virus started ticking into the thousands, then tens of thousands, then hundreds of thousands of souls, U.S. politics grew even more divided. In the summer, cities were gripped by protests in response to police violence. Since the election, the outgoing U.S. president has raged daily, calling American democracy, without evidence, a rigged and corrupt game.
And the mood on Wall Street? Well, somehow the theme of the year became ignoring all of the chaos and suffering of this dystopian present and skipping right ahead to a utopian future.
There were some good reasons to do so. For those of us lucky enough to hold on to jobs in 2020, many outlets for discretionary spending were shut down, while savings swelled. Much of that spare cash likely flowed into the stock market, whether via Robinhood traders chasing story stocks or more conservative investors seeking diversification. Investors poured $29.4 billion into U.S. equity funds in the week through Dec. 15, the fifth-biggest weekly inflow ever, according to EPFR Global. Exchange-traded funds tracking equities pulled in $46 billion in December after luring $81 billion a month earlier. The rest of those savings, the thinking goes, will stream back into the economy with gusto via consumer spending when the threat of the virus recedes.
The events of the year highlight the awesome power—and heartbreaking limitations—of central bank monetary policy. The Federal Reserve’s efforts to keep interest rates as low as possible to bolster the economy squashed the returns available in fixed-income markets, pushing investors into equities. In essence, the central bank incentivized risk-taking in finance at a time when risk aversion was advised—no, required—for everyday activities like simply going out to dinner. Fed Chair Jerome Powell made it clear on Dec. 16 that he doesn’t think the market’s euphoric embrace of risk has gotten extreme enough for him to worry about a hard economic landing.
Maintaining a warm environment in capital markets is helping keep businesses alive, and that ought to help recoup the lost jobs that have yet to return in 2020—about 10 million—when the pandemic recedes. So one way of explaining investors’ behavior is that they’ve been looking beyond a crisis that the Fed is determined will be temporary.
But the stock market is a cruel and calculating beast, and helping people get jobs isn’t high on its list of priorities. Investors also seemed to be betting on a permanent shift in the structure of work and the economy.
The market has always cheered companies that are able to reduce labor costs, but the phenomenon was turbocharged in the pandemic year. “I would summarize 2020 as the bear market for humans,” Vincent Deluard, director of global macro strategy at brokerage StoneX Group Inc., told Bloomberg in August. “Like many things, Covid is just accelerating social transformation, concentration of wealth in a few hands, massive inequalities, competition issues, and all that.”
An analysis by Deluard back then showed that stocks of companies that rely least on their employees were surging ahead of labor-intensive ones. It’s a trend that’s hard to miss when looking at the winners and losers of 2020. The bad-boy protagonist of the market story this year was Musk’s Tesla, whose shares rose almost 700% to bloat its price-sales ratio to 22 from 3. It’s a valuation that screams “bubble” to many but is much more reasonable to those who envision a future in which Tesla is first to market with a global fleet of driverless taxis.
The future isn’t all robots: After all, the next-best-performing stock in the S&P 500 this year was Etsy Inc., which could be a nice sign for the legions of crafters, knitters, potters, and painters selling their wares on the site. Still, knitting at home is a tough way to pay for health insurance.
Investors’ can’t-stop-thinking-about-tomorrow mentality is also on display in the market for initial public offerings, where a doubling in price has become commonplace for this year’s freshman class of would-be disruptors. Just check out the charts of artificial intelligence software company C3.ai, food delivery service DoorDash, and home-rental company Airbnb.
You can insert your own comparison to the dot-com bubble here—and take a side in the “this time it’s different” vs. “no it’s not” debate as well. But you don’t need to go back 20 years for an example of Wall Street getting ahead of itself. The S&P 500 surged 19% in 2017 amid excitement about President Trump’s plans to cut corporate taxes. Investors predicted the future correctly: The bill was signed in late December of that year and went into effect in 2018. But they arguably overshot. The index’s performance in 2018? A drop of 6.2%.
They say hindsight is 20/20, but when it comes to the stock market, the year 2020 has been all about foresight. That is, of course, a much blurrier field of view. —With Sarah Ponczek
©2020 Bloomberg L.P.