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What the Stock Market Is Really Saying

The seeming confidence expressed by global equity markets in the face of the COVID-19 pandemic has surprised many – including many market participants. But a closer look reveals an unambiguous message: The global economy is facing a long, deep malaise, followed by a "new normal" of reduced earnings and profitability for all but a chosen few.

JACKSON HOLE, WYOMING – In his 2004 book, The Wisdom of Crowds, James Surowiecki shows that large groups of people typically converge upon better predictions than even the smartest individual. He applies this logic to financial markets, where individual investors collectively determine the prices of stocks and bonds. Insofar as the value of a stock or bond reflects its future cash flows (appropriately discounted), markets are typically considered good predictors of the future.

And yet, we know that the collective wisdom distilled by markets is not always correct. As the Nobel laureate economist Paul Samuelson famously quipped back in 1966, “Wall Street indexes predicted nine out of the last five recessions.”

What, then, are we to make of global equity markets over the past month? Despite rising COVID-19 infections and deaths, sweeping lockdowns, soaring unemployment, and collapsing economic activity, markets have been on a tear. Are they expressing collective wisdom about a better future, or the groupthink of lemmings running off a cliff?