Market mania

Froth or fundamentals?

There may be more sense to recent market movements than you think

EVEN IN NORMAL times, there is an element of drama to the markets. The oil price may spike or slump in reaction to a geopolitical wobble; bond yields may leap on strong jobs figures; and shareholders may pump up a stock that posted juicy profits. But 2020 has taken the drama to an extreme (see chart 1). The equity sell-off in March was unmatched in its swiftness: stocks lost 30% of their value in a month. The yield on ten-year American Treasuries, the most important asset worldwide, fell by half between January and the middle of March and then by half again in a matter of days, before seizing up and yo-yoing. The contract for imminently delivered barrels of American oil briefly went negative. Over the course of 2020 timber prices have fallen by half, doubled, doubled again, fallen by half once more and then doubled again (overall, they have doubled in 2020).

If the plunge in asset prices as countries locked down terrified asset managers, then recovery—led by a fierce bull run in tech stocks over the summer—has made them uneasy. It was only in 2018 that a public company, Apple, first became valued at more than $1trn. In net terms, Apple has gained around $750bn this year. Tesla has increased in value six-fold this year, to a market capitalisation of more than $600bn, roughly the value of the other seven most valuable carmakers combined. Even stocks that were unloved earlier in the year, like banks and energy firms, have rebounded of late, on a spate of good news—of an effective vaccine, and of a clear victory for Joe Biden in America’s presidential elections. When Airbnb, a platform for booking overnight stays, made its public debut on December 10th—after a year in which no-one travelled anywhere—its share price leapt by 115%. On December 5th the value of global stocks crossed $100trn for the first time.

Financial markets reflect investors’ expectations about the future, so it is hardly surprising that they have been chaotic in 2020. But the rebound in risky assets amid fragile…