Behind the scenes, markets are pumping
Despite media reports of job losses and slumps, there is furious activity that some indices are revealing accurately
While there are standard indices such as the Nasdaq, the Dow Jones and the Nikkei, which are popularly traded on, there is also a lesser-known index called the Russell 2000.
I find this interesting because it is made up of smaller to mid-level-sized companies that are fuelling the market. These companies are more entrepreneurial. It’s quite novel. These are smaller companies that are on the edge of technology, such as NVidia and KLAC. They are taking advantage of incentives the central banks are providing right now and flying high.
The truth is, the unemployment numbers we’re seeing around the world may be a bit fictitious. The reason for this is that there are so many people who hold jobs that are kind of transitory, such as waitering or other hospitality jobs. And this is part of what is fuelling the market at the moment.
I don’t think it’s quite as bad as the media might have us believe. By and large, people are still paying their bills. And the markets are really trading in unison internationally. If you look at most of the indices around the world, they’re close to all-time highs. The Nasdaq is trading within about 600-700 points of its all-time highs. And the Dow Jones is within about 200 points of its highs.
The question is, why? It’s quite simple, really. There are a lot of things being tinkered with behind the scenes. We are in the midst of a pandemic and companies are operating on a lower flame. The Fed is allowing companies to borrow money from central government at lower rates. And while this is artificial, it is stabilising the markets. Governments are sustaining the indices so that jobs aren’t lost and economies don’t fall apart.
In the US, we had a transition from Donald Trump to Joe Biden. And these administrations could not be more different. Due to Biden’s policies, shares in car companies committed to electrical transformation, which are looking at doing away with fossil fuels, have seen incredible growth. Overall, the energy sector has been given a huge boost. And China is investing heavily in hydrogen-powered vehicles. We are making the transition to sustainable energy in a very aggressive way. It’s not just Tesla that is doing well.
Another noteworthy point is that gold has been in a very conservative position for the type of environment we are in. And while gold is close to its all-time highs, it’s not where I would expect it to be. This is probably because central governments have been really good at keeping monetary momentum going in the global economy. And it’s a very delicate situation, because if the stimulus packages are stopped, it may negatively affect the markets.
Gold is always a good benchmark to measure where markets are at any given time. It is seen as a “safe bet” in tough economic times and many traders turn to it when the world economy looks to be in trouble. That said, overall, markets will probably see a lot of movement in 2021. In many respects, 2020 was an unusual year, as we all know too well. And as the world begins to pick up the pieces this year, there are many factors that will affect the trading landscape. We’re likely to discover the true effects of unemployment on the global economy in the months to come. In the US, big business will probably be under more financial pressure as Biden’s policies come into effect. And while I don’t like to use clichés, we should be prepared to expect the unexpected.
As travel and work restrictions are lifted with vaccines rolling out, oil should begin to recover. And health-care manufacturing will perform robustly on the stock exchanges. Last year saw an immense boom in the stocks of large digital players such as Google and Facebook. But I think the US government’s proposed antitrust legislation lawsuits are something to watch in this regard.
Sometimes we forget that, primarily, the economy is fuelled by consumers. The Consumer Confidence Index is an oft neglected value, but it is a very important number. Consumer sentiment is a vital factor to consider that can’t be overlooked. And if you look at the Consumer Confidence Index, there is still a relatively healthy balance. Even though there are parts of the market that are underperforming, others are doing exceptionally well — particularly real estate. Real estate acquisitions, stocks and exchanges are high globally, relative to the environment we are in. Interest rates are low, so there is robust market activity.
The markets are hurtling through the stratosphere in the pandemic. And we are certainly seeing a lot of activity that might be considered unexpected. The trading environment is more interesting than ever. But there is ongoing momentum in several sectors. I think the next six months to a year will be very telling in terms of where exactly we will end up in space and time.
• Razak is chief trading strategist at CMTrading.
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