How is this possible?
• Canada and the United States have recorded the biggest single-quarter decline in the value of all goods and services produced in the country (GDP) since governments began tracking the figure, at the same time as
• The Canadian stock market has recovered 92 per cent of its losses since February and the US market has surpassed its record high, making this stock market rally the strongest in history and, by some interpretations, ending the shortest bear market ever.
We got some ‘splainin’ to do to make some sense of it all. Otherwise let’s just agree we’re living in Alice’s Wonderland.
First, this is an economic disaster unlike any in history in which the second quarter contraction was due to the coronavirus-driven total economic shutdown. During this time there was virtually no retail, travel or hospitality activity whatsoever, accompanied by skyrocketing unemployment.
We don’t need predictions to know that the return to a “normal” economy is going to be uneven. With 40 per cent of the service economy still shut down, this sector of the economy is not going to be up and running any time soon. On the other hand, sectors of the economy that adapted quickly — pharmaceutical and medicine manufacturing, grocery stores and big box retailers are already experiencing rapid growth.
Recovering from unemployed to employed is also going to be lumpy. Most of the million jobs that were recovered in the last two months were not full-time jobs. Millions of people are going to need continued government support for some time to come. Canadians seem to be much better cared for by their governments that our neighbors to the south – they have no new deal yet that will reassure them that they will be able to pay for the rent and the groceries. People who can work from home either stayed employed or are going to be employed faster than people who are in sectors like manufacturing or agriculture where hands on work is necessary. How fast you will see recovery, or how long you will see depression, depends on where you are and what part of the economy you’re in.
Second, much as people in general believe the stock market reflects the general economy, they are wrong on two counts: first, as we’ve seen above “the economy” is lots of different sectors some of which will grow — or not. Second most Canadians and Americans have some investments, but do not, for the most part, pick stocks. The stock market is populated by professionals who buy stocks for the mutual or exchange-traded funds for other people put into their TFSAs or RRSPs. Those professionals have decided that stocks are likely to behave better than alternative investments like cash (0-minus 2 per cent return), bonds (1-3 per cent return), real estate (retail – negative returns; warehouses and data centres better returns), something else like gold (already overpriced but maybe still going up.)
So they’ve judged the alternatives to stocks as weak, but what’s their time frame? Neither they nor we have any insight into whether we’ll have two or three bad years before things really get better – or when full-time employment will steadily pick up, or when governments will be able to stop intervening to support the economy, or when interest rates will be allowed to rise to some rate that’s not near zero.
So after all this ‘splainin’, does it make sense? Yes, as long as you realize that significant damage has been done to the economy and that the stock market is a very imperfect forecasting device: all it’s saying today is that at some point in the future the economy will get better.
Dian Cohen is an economist and a founding organizer of the Massawippi Vlaaey Health Centre. Cohendian560@gmail.com