Markets surge as democracy goes close to collapse

Riots in Washington led to the biggest crisis in western democracy in living memory, and stock markets went up.

Article updated: 11 January 2021 3:00pm Author: Michael Baxter

9:30am January 6, 2021: the S&P 500 stood at 3,712. The next few hours saw rioters occupy US Congress, democracy itself seemed under threat, some called it an attempted military coup. 

11:00am January 7, 2021; the S&P 500 stood 3,807. That was a good day’s trading. One can't help but think of an evil villain, stroking a cat, maniacally laughing while buying shares as rioters home in on the centre of western democracy.

Even the FTSE 100 index, an index that I sometimes think preoccupies a different universe from the US equivalent has risen since the riots.

The reason, I read, is that the markets were delighted with the news that that the Democrats had won the two Senate seats in Georgia, giving them control of Congress. That means lots of government stimulus and cheap money boosting the economy.

It is just that a few weeks earlier, the markets soared on what at the time was the perception that the Republicans would win Senate. The markets like it, I read, when Congress is split, with one party controlling the House of Representatives and the other Senate, that way it stops the US governments from applying policies deemed too extreme.

Are you getting the contradiction? In November, it is “yippee a divided Congress,” in January it is is “yippee a united congress.”

Now, I am going to exclusively reveal something. Are you ready? Let me emphasise; this really is something of a scoop; something very few people, except maybe the Illuminati, are aware of. So are you ready for this hot news? Here goes; a virus ran a-mock across the world in 2020, there, said it.

It may be you already knew this — which will of course mean that you, yourself is a member of the Illuminati, but the markets clearly had no idea. I know this for a fact because despite the global economy suffering its biggest peacetime downturn ever recorded in 2020, the S&P 500 rose around 20 per cent. If that doesn’t prove that the existence of an obscure virus, (which I can exclusively reveal is called Covid-19) was unknown to the markets, I don’t know what does.

Okay, I admit, I was not 100 per cent serious above. But there is a serious point.

The markets are meant to value-in future events, what they think might happen. They get wrong-footed if something happens that they hadn’t even got close to anticipating.

Now, I don’t think the markets had anticipated a virus in 2020 — no one did, not even Bill Gates who simply said that there would be a virus one day.

The virus should have wrong-footed them. Instead, and to quote the band Beautiful South and a 1961 movie starring Kenneth Willians, Sid James and Joan Sims, they carried on regardless.

There is a sort of logic to this. When the markets value an asset, they are supposed to estimate future earnings and discount them by a given interest rate to derive a net current value. If news emerges that suggests interest rates will be less than expected; they do not discount future earnings by so much.  

But I am not buying this as a reason to justify higher asset prices. It makes no sense to buy because of unexpected bad news because it means lower interest rates. The damage done by the bad news should always exceed the positive development created by lower interest rates.

Maybe this shows how asset prices and the economic well-being of ordinary people are becoming increasingly disconnected. I don’t buy this either — not in the long run. If ordinary people are shut out from benefiting from whatever good news there is, the long term effect will be negative.

Maybe there is something else at play.

Maybe the good news created by the terrible events of 2020 and now of January 6 2021, is that we can finally say goodbye to austerity and instead get what they call a Keynesian stimulus. 

There is more. Covid has accelerated the adoption of digital technology. Maybe, just maybe, the events of January 6th will lead some tech companies to act more responsibly.

The combination of accelerated digital tech adoption, a Keynesian stimulus of the scale we normally only see during wartime and maybe more responsible action by techs is potentially good news that outweighs the bad.

At least, the above is the only explanation I can think of, without concluding that the markets have just gone mad. Mind you, as the events of January 6 show, there is a lot of madness about, at the moment.

PS: this is my last month writing this column. If you want to stay in touch, look me up on LinkedIn, email me on michael.baxter@techopia.co or go to www.techopia.co


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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