Markets are up but the economies are down.

It is strange to see equity markets in most countries performing well, while GDP figures are signaling a deep recession. In the USA especially we see the S&P500 and Nasdaq at record levels but the economy is on a stimulus drip. The answer to this conundrum can be found when we analyze the different sectors. What we see all around us, is the collapse of businesses around leisure activities and travel, such as restaurants and hotels. These sectors have been decimated by the pandemic but they do not represent a large part of the indices.

Restaurants not privately held in the US, for example, account for a mere 1,2% of the S&P500; hotels, resorts and cruise lines only 0,2% and traditional retailers only 6,2%. Airlines, one of the worst-hit sectors, are only 0,4% of the S&P500.

If we turn to the information technology sector, we see that it comprises around 23% of the S&P500 and it has been flying high. It is becoming clear that the pandemic caused utilization in this sector to accelerate enormously. In some cases, 3-year predicted growth figures were attained in three months and online streaming numbers exploded. The lesson we can take from this is that judging the performance of the equity markets by looking at index returns can be very misleading; or extrapolating your subjective everyday reality based on what is happening around you, onto the equity market, can be very costly.

If you look at the astronomical amount of debt governments are ratcheting up; the ridiculous reality of negative interest rates; and the sky-high valuations for technology companies; it is clear that something’s got to give. But just remember the words of the economist John Maynard Keynes, “Markets can remain irrational longer than you can remain solvent”.

So in a world where you receive no income from cash; where you pay a very high price for technology shares; where governments might default on the bonds they sell you;  where financial, industrial and property companies go out of business; where do you invest? Well, a lot of people are turning to gold and bitcoin. We will explore these soon.

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