Global Stock Markets Could Predict Economic Future Post Covid-19

The world is confused and panicked about Covid-19. We are awash in data. But the data, while accumulating fast, is wildly incomplete and too often sensationally misinterpreted. Where to turn for truth? A famous investor friend of mine, who runs a $100-plus billion fund for more than 2,500 clients, likes to say that global stock markets are the best predictor of the future—not only financial trends, but of all important trends. That includes this year’s monster, Covid-19. Long before Wikipedia, the global stock markets embodied what is now called “the wisdom of the crowds.” Markets are vast storehouses of data, analytics, algorithms and predictions of the near-term future.

In other words, you’re safe in assuming that today’s global stock markets have already absorbed and processed as much information about Covid-19—pessimistic and optimistic—as have Imperial College, Johns Hopkins, the World Health Organization, and all the world’s medical universities, hospitals, health services and governments combined.

That is not to say the global stock market is a perfect predictor. It can be crazily optimistic (e.g. 1929, 1999) or pessimistic (e.g. 1932, 1974, 1997 in Asia, or 2009) at any given time. Its horizons can be short in a bear market or long in a bull market, then suddenly switch. As Warren Buffett likes to say, the stock market is like a voting machine in the short run, but a weighing machine in the longer run. It always swings back to some approximation of the truth. It does so generally faster than any health service, research foundation, or government can do.

Think of it this way: global stock markets and investors command more computing power, better software, faster networks, and the intense focus of tens of millions of individuals betting their own money. Most investors are highly accomplished, numerate and analytical, representing in their aggregate a vast and virtual supercomputer. This supercomputer likes nothing more than to bulldoze those acting on bad data or their own confirmation biases.

My friend, the one with the fund, likes to say, “Mr. Market is the Great Humiliator of us all.” The market rewards good decisions and punishes bad ones harshly. Can we say the same of most health services, research foundations, and governments?

Covid-19 is a global crisis, first spotted in China, then the rest of Asia and Europe. Now it is surging in the Americas. The global stock markets—around $60 trillion in size as of April 1—respond daily to news about Covid-19 whether awful or promising. That includes policy responses, whether good or bad. While global stocks have seen dramatic declines so far in 2020, China’s stock markets are down by comparatively modest percentages this year—Shanghai down 7%, Shenzhen up 2% and Hong Kong 15% lower—reflecting China’s first-to-suffer, first-to-recover status.

Now let’s look at the U.S. stock markets. The S&P 500, Russell 2000 and Nasdaq 100 are down 15%, 29% and 4% respectively. What does that tell us? The sagging Russell 2000 says small companies will suffer the most over the next several months; many small companies will cease to exist. On the other hand, Nasdaq 100 says big tech companies are in the best shape. They have the cash. They are not dependent on physical labor or foot traffic.

Tech’s expanding role in all industries hints at why the Nasdaq 100 has fallen less than the S&P 500 and Russell 2000 since markets turned bearish. Precisely because Covid-19 has pushed all other stories off the front page, it’s easy to forget the huge digital transformation wave in front of us. Don’t make that mistake.