Markets In The Corona Virus Crisis - The Great Decoupling

Mahmut Karayel
20 Apr 2020


S&P 500 is having a mini bull run. Yet most economists agree that this will be the worst economic downturn we have seen in the last 90 years. The US, especially New York, has become the epicenter of the pandemic. There are deep divisions among the officials about when to open the economy. Most experts advise better safe than sorry. Very confusing.

Have you noticed that most people, including our blog, assume that the stock market and the economy are closely related? The current US administration manages the economy and the political narrative as if the economy is basically the stock market. And up it is going in hopes of re-opening and return to normalcy. See the progress in the graph below.

In the meanwhile, we are watching in horror the slowdown or complete cessation of economic activity in transportation, sports, entertainment, conferences, restaurants, hospitality, construction, and many other service and manufacturing.

The graph below shows the value of a $10,000 portfolio during the two most severe downturns in the past 80 years.

Comparison of Two Black Swans

What is the explanation? Have we collectively gone delusional?

I think the equity investors have picked a favorite, and it is the mega-cap companies representing the digital economy. The overall bet is that these companies will not be affected by the COVID-19 crisis. Everything else be damned.

I wanted to check this hypothesis with as basic a dataset and as simple an analysis as possible: I looked at a few of the KPIs of common indices, averaged with equal weight:

Market Cap (Bil) Market Cap as % 3-month Return P/E Ratio Leverage Price / 50d MA Price
Russel 1000 + Russell 2000 31,500 100% -28% 40.8 41.5 89%
Russel 1000 28,700 91% -24% 41.3 46.4 93%
S&P 500 25,700 82% -21% 26.9 47.3 94%
Nasdaq 100 11,200 36% -9% 33.9 43.9 102%
Dow Jones Industrial 7,500 24% -16% 20 52.3 99%
Russel 2000 2,800 9% -31% 40.6 39.1 87%

The total market cap of the US stock market is $32 trillion (was $39 trillion two months ago). The companies in the Russell 3000 index make up almost 99% of this market cap. Russell3000 is more representative of the economy than the other smaller indices.

We can look at the first line in the table to roughly see where the US market is at in terms of some indicators. The last column represents the ratio of the most recent price to the 50-day average. If this number is above 100%, that means the price broke above the 50-day average. Note the following:

  • S&P500 did much better than the overall market (Russell 3000)
  • DJ Industrial index which represents the 30 largest diversified companies did even better
  • Nasdaq 100, representing mainly the digital mega-caps was the best performing index
  • Russell 2000 was the worst performing index although it is the least debt-ridden of all

Investors like digital and investors like too-big-to-fail. Not too strange, really. Besides, more people work for small businesses in the US than people who work in the S&P 500 companies. And many of these are gig-workers with no benefits or savings. They are the ones who helped the unemployment statistics reach a record low three months ago. To a large extent, they will be the ones that will be looking for a new gig. The digital economy is fueled with huge capital investments and not much labor.

The stock market is an indicator of the investor’s mood. But it can run afar from the economy as perceived by the average worker.

Ongoing updates of our tracking of the COVID-19 crisis will be bi-weekly.

Please share your thoughts in the comments section.

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Suggested Data References in This Article (ALTADATA Marketplace)