The last week of the month saw more gains for stock markets globally, resulting in every major
index recording a positive month and in some markets the lows of March seem a distant
memory. This rebound has been strongest in the US where, after a monthly gain of 4.26%, the
Dow Jones index is now 2.27% higher than it was this time last year. Remarkable though this
figure may be, it pales into insignificance when compared to the NASDAQ 100 which is up by
36.94% in the same time frame. The returns from the NASDAQ are perhaps easier to
understand. The index is dominated by technology firms set to benefit from changes to the
way we work and live post COVID, with increased use of payment systems, online shopping,
remote working and so on likely. However, it is harder to see how the broader Dow Jones
index is reflecting the situation most Americans find themselves in. When the US
unemployment figures were announced for April they showed that 20.5m jobs were lost in a
month and that the jobless rate had spiked to 14.7%, in the face of such devastating numbers
the Dow Jones rose by 455 points. The question seems to be what has caused this disconnect
between markets and everyday life and any longer term implications there might be to it ?

Since the crisis started the Federal Reserve has pumped over $1trn into financial markets and
the speed and size of this intervention encouraged investors to think that they would do

whatever it took to keep the economy afloat. This money has flowed into markets and with
bond yields at low levels (see previous article) the temptation has been to invest in the more
speculative stock market in an attempt to get a higher return. Furthermore, although not as
tech heavy as the NASDAQ, the Dow Jones is weighted towards Apple, Amazon, Google and
Facebook, companies that seem best suited to benefit in the post COVID environment.
According to Jeremy Siegel, who teaches finance at the University of Pennsylvania’s Wharton
School, over 90% of a stocks value is on predicted earnings over 1 year ahead, in other words
markets are forward looking to see who will thrive in the long run and few would argue about
the likelihood of the tech firms continuing to grow.

While the tech giants and other big names have the fire power to ride out the storm and look to
be in decent shape as and when the wider economy recovers, the same is sadly not true for
small and medium sized businesses. This is the area that has been, and will continue to be,
hardest hit by the virus and this is not reflected in the indices. Furthermore, as these smaller
companies fail the bigger players often benefit, every small coffee shop that fails is one less
competitor for the likes of Starbucks. Perhaps this goes some way to explain why Amazon’s
stock price is up 45% since 18th March and is now at an all time high.

If the above in part explains the rise of the Dow Jones it also highlights the potential future
issues. In 1997 there were around 7500 publicly traded companies in the US but this number
now stands at around 3600. In the same time the economy has more than doubled in size.
While there has been a shift in how many companies raise funds, often preferring the less
regulatory heavy private equity market, this would still suggest that more money is flowing into
fewer hands. As of 2016 the wealthiest 10% of Americans owned 84% of all stock held by US
households, and it would seem extremely likely that this concentration will have increased in
the interim. It has long been said in the US that there is a big gap between Wall St and Main St
and it seems this is widening with only the already wealthy benefitting.

The second part of the question above is far harder to answer. No one really knows what the
wider implications for the disconnect between Wall St and the real life of millions will be. You
can speculate that eventually some balance would have to return as the inequality increases,
potentially through a change in political direction. But against this the American dream still
holds for many people who are protective of the idea of anyone being able to make it, even
though the evidence suggests a diminishing number ever do.

From an investors point of view, while it may seem counterintuitive for markets to be as high
while we are still in the middle of a crisis, the outcome of which is far from certain, it would
probably be prudent to think hard before betting against the wall of money that is being
injected each month.

The situation remains extremely fluid, however, and sentiment would change quickly were
there to be a significant second wave of the virus in the near term. This, together with an
increase in China/US tensions alongside the Presidential election scheduled for November,
mean it is likely that there will continue to be volatility going forward.

Author Trevor Hubner