The More Markets Change, the More They Stay the Same

Moreover, the tally of winners and losers is exactly the same as it has been over the past decade. Technology firms and other “growth” stocks have shot up at the expense of “value” companies that trade at cheap levels relative to earnings, such as banks. Big companies are beating small and medium-size ones. U.S. markets are outperforming the rest of the world. Beyond stocks, corporate debt is almost entirely driven by central-bank action.

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A rush of retail-investor money in May appeared to give a push to the shares of the most downtrodden companies. But this “dash for trash” faded right after the S&P 500 hit its break-even point for the year.

So far, this makes the current crisis totally different from 2008. The collapse of the banking system reversed many trends, notably the strong performance of value stocks and smaller companies, that had elevated many active fund managers to stardom. Today’s markets instead assume that Covid-19 will amplify existing forces.

Among the past decade’s winners, only the aviation industry, which was previously riding a supercycle in travel demand, is now rightly seen as challenged for years to come.

The impact seems very contained given that the outbreak is upending many traditional tenets of economic policy. Officials have embraced government spending to fight the economic rout, and are souring on trade. Western firms may seek to protect their supply chains by bringing them closer to home, potentially boosting domestic employment while increasing production costs.

Many economists believe that, even though the lockdowns have depressed consumer prices in the short term, a retreat from globalization and activist fiscal policy increases inflationary risks for the future. This possibility isn’t priced into inflation-hedged assets, and would be a real threat to the supremacy of “growth” stocks, which have been helped by low bond yields.

But such fears may be overdone. Without a big rebound in unionization rates, rampant inflation is unlikely even if governments spend more. Recent research also suggests that the power of multinational companies in itself safeguards the resilience of global trade, even if there is some reshoring of supply chains. At any rate, Wells Fargo analysts estimate that reshoring will reduce U.S. imports by less than 1% of gross domestic product.

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The pandemic has fed investors’ appetite for volatility trading. But analysts say these bets have grown so popular that they’re driving more volatility, making the markets riskier for everyone.

Unlike the 2008 crash, the Covid-19 crisis wasn’t triggered by forces within the economy. Back then, the financial sector led the S&P 500, only to face severe doubts about its potential to generate returns. This isn’t the case for tech companies, the current leaders. The power of their business models has only found confirmation in the pandemic, which seems likely to permanently increase demand for online shopping and remote working.

The world is undergoing big structural changes this year. At this point, though, they mostly seem to be ones the market has been betting on since 2008.