On Saturday the ABC published an article with the remarkable headline “The share market is telling us how we’re doing in the fight against coronavirus“.
The article was by a business journalist, so I suppose the old aphorism that “if all you’ve got is a hammer everything looks like a nail” applies, but it’s a bold assertion nonetheless that the stock market is the place to look for a measure of our success against the pandemic’s progress, rather than more prosaic and direct things like number of deaths. It’s bold also given that, at first glimpse, the graph of the ASX200 doesn’t look anything like other measures of “the fight”.
For this claim to be plausible a couple of things must be true. Firstly, we have to accept that fluctuations in a single figure of merit from the the valuations of publicly traded companies across all industry sectors is also an indicator of our success in dealing with a public health crisis, namely a pandemic. That’s despite the obvious fact that some sectors, such as travel, hospitality, and entertainment are going to be very badly hit, while others, such as pharmaceuticals, may experience a surge, yet somehow the aggregate of all these wildly varying indices is going to yield a useful measure of “how we’re doing”.
Secondly, having accepted that a measure drawn from the financial world is a good way to judge “how we’re doing” in a public health crisis instead of measures from public health or employment or social equity or public satisfaction, it nevertheless seems to me that if the stock market is rising that means we’re “doing” well, and if it’s falling we’re not “doing” well.
So here is the ASX200 for most of 2020. Are we “doing well”?
There are four very obvious things to note:
- Until Friday February 21st we were “doing well” against coronavirus. If anything, we were improving slightly.
- On Friday 21st something terrible happened and we then did very, very badly (against coronavirus) for about a month until, quite suddenly, on Monday the 23rd of March we sharply reversed our fortunes.
- Since the 23rd of March we have been slowly doing better and better.
- There have been some ups and downs for a few days at a time, but overall we’ve clearly been “doing well”
Perhaps the fifth, and most obvious thing to note is that this is clearly rubbish.
If the stock market were really some indicator of “how we’re doing” against the virus it would be reasonable to expect that it would correlate with other sensible measures of “how we’re doing” against the virus, such as number of cases or number of deaths—if you want actual, virus-related public health measures—or such as employment or CPI or GDP if you want other economic measures, or perhaps measures such as unemployment or public sentiment if you want measures of social good.
Remarkably, though, the thing that the graph of the ASX200 correlates with almost perfectly is something entirely different: the Dow Jones, that is, the US stock market…
Here is the Dow:
Strangely enough, there are four obvious things to note here as well:
- The ASX200 is an almost perfect replica of the Dow.
- The date where Australia’s pandemic response suddenly started to go badly against the virus, February 21st, is by some remarkable coincidence the date where the Dow began its precipitous fall.
- The date where Australia’s pandemic response sharply turned the corner against the virus, March 23, is by an even greater coincidence the same date that the Dow also suddenly began a sharp recovery.
- Australia has currently recorded around 17,000 cases of Covid-19, and sadly 200 deaths, whereas the US has over 4,500,000 cases and over 150,000 deaths. Yet the stock market tells us that we’re both “doing” almost exactly the same, and best of all, things in both countries are steadily improving.
This is, to borrow a term from stockbroking, bullshit. These two stock markets are displaying almost identical patterns of behaviour, yet the contrast between the Australian and US experience of Covid-19 could not be more stark. Or is the Australian market telling the truth about “how we’re doing” against the virus and the Dow lying? And how can you tell when the market is telling fibs?
In fairness to the author’s claim, however, let’s have a look at some other Australian indicators of “how we’re doing in the fight against coronavirus” to see how they align with the Australian stock market.
Here’s a graph of Australia’s daily and cumulative coronavirus cases. Perhaps that shows the same pattern and correlates with the ASX200?
How about Australian covid deaths?
No, not that either.
I won’t bore you with graphs of the staggering rise in unemployment and underemployment, or the hundreds of thousands of Australians who have simply given up and left the labour market altogether, because none of those graphs look remotely like the ASX200.
Perhaps, though, I’ve done the author and the ABC an injustice by misunderstanding what they meant by “how we’re doing in the fight against coronavirus”, and they’ve got some strange, financial analyst interpretation of “the fight against coronavirus” that escapes mere mortals such as myself. Here’s a quote from the article, speaking of the market:
In recent weeks you’ll find it’s stalled, or flatlined. […] Market participants describe this as the stock market being range-bound, or in a holding pattern. What the share market is telling us is that the future is uncertain to the point where the market is unable to make its next move, up or down. We are now unable to forecast the economy’s growth trajectory with any degree of accuracy or predict how many businesses will make it through to the end of the year.
Now, not being a financial analyst or business reporter I can’t comment on the accuracy of this statement. It doesn’t mention the virus. Apparently the graph of the ASX200 (or the Dow Jones) isn’t showing an overall improvement at all, it’s “range-bound” because we’re unable to forecast the economy’s growth…
There are clearly subtleties in the ASX200 graph that are more important than the fairly clear upward trend, or the fact that the huge surge in virus cases and deaths in past weeks—something that I would regard as a reasonable measure of “how we’re doing against the virus”— hasn’t produced any apparent change in the market at all.
So according to the quote, the stock market isn’t just a measure of the economy’s growth, it’s also a measure of “how we’re doing in the fight against coronavirus”, despite the fact that it shows no relation to actual measures of how we’re doing in the fight against the coronavirus. That almost perfect correlation with the Dow Jones is telling us instead that “how we’re doing” against the coronavirus is that it’s impossible to forecast the economy’s growth.
More simply, an economic measure is apparently telling economic experts that it’s difficult to tell which way the measure will go in future, which is what economists mean when they speak of “how we’re doing in the fight against coronavirus”; it has nothing to do with life and death, but just whether they’re confident which stocks to buy.
Boiled down, I think that what the article is saying is that stockbrokers are no better than anyone else at foretelling the future in unprecedented times…
However the instrument they use to make this prediction isn’t anything obvious like infection figures, or tracking the progress of vaccines or listening to public health experts; they watch the ASX200, an almost perfect mirror of the Dow in the US, and work out what’s happening in the real world in Australia (or is it the US?) by noticing it’s “range-bound”, and from that they deduce that “how we’re going” is that perhaps we’re not sure what’s going to happen next.
When all you have is a hammer…