This seems peculiar to experienced investors. To ordinary people, it looks insane. We are poised on the brink of the biggest economic downturn since the Great Depression, the world’s two largest economies are not talking to each other and no one can say with any certainty that we are past the worst of the pandemic.
When it comes to the market, things are not as black and white as they seem. There is not one market nor one economy at work here. Unlike with the credit crunch 12 years ago, which cast a shadow over all corners of output, the coronavirus outbreak is more discriminating in its impact. There are winners and losers here. Two economies and two stock markets.
The divide is obvious. Telling everyone to stay at home for weeks on end has had a dramatic impact on how we work, shop, eat and amuse ourselves. The pandemic has compressed what would have been years of technological change into months.
It is unsurprising to see parts of the economy that fuel our digital lives are thinking crisis, what crisis? At the other end of the spectrum: airlines, restaurants, shops, hairdressers, dentists are all on their knees.
The stock market, in particular the US stock market, is weighted towards the parts of the economy that are doing OK. The technology sector represents 26pc of the value of the companies listed in the S&P 500 index. Add in healthcare, a beneficiary as we seek to avoid a repeat of the Covid calamity, and you have more than 40pc of the index. Throw in communication services and you have more than half the market, according to numbers from Credit Suisse.
Countercyclical stocks
Next, consider what determines a share price. Two things: the profits a company is expected to earn, and the price an investor is prepared to pay for a share of those earnings.
When it comes to company profits, those three sectors that account between them for half the value of the stock market are expected to experience a modest decline this year ranging from just 0.7pc for technology to 3.4pc for healthcare and 13.5pc for communications. That’s a fraction of the hit that sectors such as consumer discretionary, financials and industrials are forecast to endure.
That’s bad news for the companies in those areas, and their employees, but none of these industries accounts for more than 10pc of the index. The energy industry, in which profits are expected to be wiped out, represents just 3pc of the value of the S&P 500.
The second part of the share price equation is also interesting. The price that investors will pay for a share of a company’s profits is only partly determined by the level of profits today. More important is the long-term direction of those profits. If today’s earnings drop is seen as temporary then it can make sense to pay a high multiple of currently depressed earnings, in anticipation that they rise.