History tells us that small investors piling into a soaring stock market is a sign of trouble. What should we make, then, of the US markets racing to record highs on the so-called Biden Bounce?
Markets fell vertiginously in March, when the first lockdowns were imposed but have rallied strongly – and small UK investors have piled in.
It’s a sign of the times that City firm IG is buying Chicago-based Tastytrade, which allows individuals to trade in options and to dabble in short-selling, in a $1billion deal. To the uninitiated, it may seem odd that share indexes are hitting highs when the world economy is mired in the worst crisis for generations.
Turning point?: History tells us that small investors piling into a soaring stock market is a sign of trouble
What’s going on? Wall Street, though traditionally a Republican bastion, is mightily relieved at the election of Joe Biden and Kamala Harris. Partly because the huge stimulus and environmental spending they promise should buoy the economy but mainly because they are Not Trump. The hope is they represent the return of sanity.
There are, however, two bigger drivers: tech stocks, which have flourished in the pandemic, and the levels of government support to Covid-stricken economies.
Staggering sums are being deployed in the US and UK. In 2008 the UK government spent 1.5 per cent of national income to combat the financial crisis. The figure to battle Covid is 26 per cent. Tech has been bubbling up despite fears that the Silicon Valley giants will be hit by regulation. The so-called FAANGS – Facebook, Apple, Amazon, Netflix and Google parent Alphabet – collectively gained more than $262billion on Biden’s inauguration, taking their market value to $6.15trillion.
We have seen something similar, albeit smaller scale, in the UK, where companies such as Ocado – a tech business masquerading as a grocer – and recently-listed The Hut Group, an online beauty operation, have seen their shares rocket.
This week Apple will report its results and analysts predict it could hit its first-ever sales of $100bn in a single quarter. Figures from Microsoft and Facebook are also awaited with excitement.
The tech shares boom is a product of greed and frustration. Sure, people are tempted by gains. But investors are disgusted at the terrible returns in so-called safe deposit accounts and are shunting into riskier assets. That is a major factor behind scandals such as the LCF affair and the rush to invest with Neil Woodford. It is also even more reason for NS&I to be ashamed to have inflicted dreadful service on its depositors for which its boss apologised last week. Not good enough: NS&I should be playing a constructive role in the pandemic, offering national reconstruction bonds with a decent return, so savers could help to finance the recovery from Covid.
The immense QE money-printing by central banks since the financial crisis has fuelled asset inflation. QE helps depress interest rates, which drives up share and house prices. It isn’t free money. It is effectively being stolen from savers and the asset-poor, including the young.
The recent rise in Bitcoin is further evidence of a weird world on the markets. Its existence shows loss of faith in conventional central banks, and that is perturbing.
If US tech falls to earth, it will hurt a lot of people in the UK. Many small investors are exposed through funds such as Scottish Mortgage investment trust, a big holder of Tesla shares.
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