Why the disconnect between stocks and the economy is worrying
Posted June 3, 2020 8:11 a.m. EDT
CNN — Global stocks have hit their highest level since early March as investors pile back into riskier assets, eager to get in on the euphoria that has overtaken markets in recent weeks.
What's happening: MSCI's All Country World Index is now up more than 35% from its low point on March 23. The index has notched seven straight day of gains.
That's despite ongoing concerns about the health of the global economy, little visibility on corporate earnings, uncertainty about the pace and shape of the rebound from coronavirus and widespread social unrest in the United States sparked by the death of George Floyd.
"The fundamental problem is market psychology and whether the narrative shifts from the summer of hope to the summer of discontent, where first consumers and then investors become jaded by a post Covid-19 hangover compounded by a White House running out of options on all front[s], be it domestic or foreign policy," Stephen Innes, chief global markets strategist at AxiCorp, told clients Wednesday.
But beyond worrying that assets like stocks are due for a nasty correction, there's another reason to be concerned about the disconnect between stocks and the wider economy, Jan Dehn, head of research at Ashmore Group, an investment management firm focused on emerging markets, told clients this week.
Dehn argues that stocks and bonds — which have been buoyed by record support from governments and central banks — have effectively become too big to fail.
"If central banks were to allow asset prices to reflect the actual underlying fundamentals — record levels of debt, record low productivity growth, record unemployment, record populism — the resulting crashes in financial markets would be so large that most Western economies would be plunged into deep and lasting depressions," Dehn told clients.
This isn't a viable outcome — which means investors have bet that they can count on central banks to keep propping up markets. "So far, they have been right," Dehn said.
See here: The European Central Bank on Thursday is expected to expand its massive coronavirus-era bond buying program, providing fresh support.
So why is this a problem? Dehn said he's worried that volatility will decline, hitting investment margins. Productivity, he fears, will also decrease as markets cease to weed out the laggards and encourage risk taking.
"As markets are put out of action through ever greater government intervention — de facto shifts towards old fashioned state planning — then markets cease to perform one of their most important functions, namely to bring down unsustainable economic systems," he said. "Instead, the system is condemned to a slow death from the inside."
IPOs are back as the stock market soars
lPOs had been put on hold by the pandemic as stock market volatility kept companies on the sidelines.
Now, with the VIX — a measure of S&P 500 volatility — at its lowest level since February, firms are once again looking to tap funding from public investors.
The latest: The Financial Times reports that Warner Music Group did not price its IPO on Tuesday to observe an industry-wide shutdown in support of the Black Lives Matter movement.
But the company is expected to go ahead Wednesday morning with a deal that could value Warner Music, the record group behind popular artists such as Cardi B, Lizzo and Bruno Mars, between $11.7 billion and $13.3 billion.
Others are set to follow. ZoomInfo Technologies is due to list shares on Thursday, according to the Wall Street Journal. The marketing data company on Tuesday boosted its target range for shares to between $19 and $20 due to strong demand.
It's a sign of how much sentiment has changed since the US stock market hit its low point in late March. But PitchBook analyst Cameron Stanfill thinks it's too early to claim a rebound is in full effect.
"Some of the biotech companies will continue to list and a handful of other companies that need or want to try their luck in the public markets," Stanfill said. "But I don't expect that to be near the volume we had the last two years."
The data: In 2019, an estimated 178 companies went public in the United States, according to PitchBook. From March 1 to May 31, however, just 21 companies held IPOs. Eight of those were smaller and didn't occur on formal exchanges.
The number of black leaders at US companies is still dismal
True corporate diversity can't be achieved unless it's reflected at the top. And given the persistent dearth of black professionals in power roles at major companies, corporate America has a long way to go, my CNN Business colleague Jeanne Sahadi reports.
Companies are not required to disclose the race and ethnicity of their C-suites and boards, so the statistics that do exist are often collected by hand or extrapolated from surveys.
Here's what we know from a variety of sources:
Black professionals in 2018 held just 3.3% of all executive or senior leadership roles, which are defined as within two reporting levels of the CEO, according to the US Equal Employment Opportunity Commission.Among Fortune 500 companies, less than 1% of CEOs are black. Today there are only four, down from a high of six in 2012, according to Fortune. Black Enterprise's 2019 Power in the Boardroom report found that among S&P 500 companies, there were 322 black corporate directors at 307 companies. Of those, 21 were chairmen and lead directors. But the report also found that more than a third of S&P 500 companies did not have any black board members whatsoever.
What gives? One problem is that corporate leaders aren't doing enough to develop a pipeline of black talent to promote into the C-suite and to be named to boards, per Cari Dominguez, former chair of the EEOC and a member of the National Association of Corporate Directors. Read the full story.
Campbell Soup, Cinemark and Canada Goose report earnings before US markets open.
The ADP report on US private employment arrives at 8:15 a.m. ET.The ISM Non-Manufacturing Index for May, a closely-watched gauge of the US services sector, follows at 10 a.m. ET.
Coming tomorrow: The latest data on initial and continuing US unemployment claims.