Since the March lows, most of the main world equity indices have rallied sharply even as the GDPs for those same countries have shown economic declines. I have expressed before that investors apparently believe that the economies will return to normal once the lockdowns are lifted and that the growth rates will return rather quickly. I still question whether this will happen that quickly. Even as governments take action and lift restrictions, there will be those consumers that maintain the daily routines they have developed during the restrictions. These consumers will be cautious about how they resume their lives with the uncertainty of the COVID-19 virus still lingering.
I wrote an article back in April that recapped the global stock plunge and pointed out how some key indices had performed during the route. That article was published on April 3, and that was about 10 days after the indices bottomed. With that in mind, I started looking at global indices to see how they have performed on a year-to-date basis as well as how they have performed since the March lows. What I found was interesting.
The first chart shows the YTD performances through May 18. The Shanghai Composite index has performed the best with a loss of only 5.41%. The S&P has the second best performance with a loss of 8.3%. Those are the only two indices that managed to keep their losses out of the double-digit range.
The Brazilian Bovespa had the worst performance at -29.79% and the French CAC was the second worst performer with a loss of -24.8%.
If we look at how the indices have performed since March 23, the date of the low on the S&P, the returns have been pretty phenomenal. The CAC, the DAX, and the Nikkei each bottomed a few days before the S&P did, so the percentage of the rallies from their lows would be different if I used March 18. Most notably, the DAX has rallied by 30.78% since March 18, and that is the top performer.
The chart below is from March 23 and it shows how the S&P has led the way with a gain of 32.02%. The Shanghai Composite, the Hang Seng index, and the Bovespa all hit their lows on this same date. The Bovespa has enjoyed the second best performance during this time period with a gain of 27.72%, and yet it still has the worst performance of these indices on a YTD basis.
We see that the Shanghai index has the lowest return since March 23, and I found that to be surprising. Yes the index suffered the smallest loss in the first quarter and it has the best performance of the bunch on a YTD basis, but I would have thought it would have performed better off the March lows.
China got hit with the virus first as the place of origin and therefore they were dealing with lockdowns far before the rest of the world. They also started opening the economy back up before the rest of the world. I even recommended Alibaba (NYSE: BABA) to my subscribers in March. Part of my thinking was that China was ahead of us in terms of the timeline that was necessary to deal with the virus. Now Alibaba has performed well for subscribers with a gain of almost 20% since it was recommended, but that lags the returns of a number of other recommendations.
In an effort to try to track the performances and tie them to a quantifiable indicator, I compared the first quarter GDP numbers for each country to the returns on the index. Unfortunately, there didn’t seem to be any rhyme or reason to them. The table below shows how the indices compare. The countries are sorted by the GDP growth rate with Brazil yet to report Q1 GDP.
With no identifiable pattern to the GDP growth rates and the index performances, the best explanation I could come up with for the gains since the lows was that it was dependent on fiscal and monetary policy. The US has taken huge steps to fight the impact the virus has had on the economy and arguably we have been the most aggressive with our actions.
The expression, “Don’t fight the Fed” has been around for decades and it appears that it is as true now as it has ever been.