Why does the stock market like deaths so much?
This time might be different.
This week's substack was supposed to be about inflation. Due to the events, I changed the subject.
You may remember scenes of investors cheering the COVID-19 situation worsening, the number of cases & death increase.
The rationale is simple: the worse the situation, the more support & cash injection they were expecting from the Federal Reserve.
Here is a graph of the Dow Jones Industrial Average ( $DJI) vs. the number of American 🇺🇸 death during that period.
Yes, the stock market feasted over ONE MILLION US 🇺🇸 death.
Sick, isn't it?
Now let's look at wars & epidemics in a longer time frame. After major events, the $DJI gains averaged 9% after 1 year, and 25% after 2 years.
After 1 year, it was negative only 3 times: 1940,1955 & 2001.
After 2 years, it was negative only 1 time: 1940.
"The Dow rose 88% in 1915 after it reopened"
"Hitler invaded Poland on Sept 1, 1939. When the market opened on Sept 5, the Dow shot almost 10% higher that day."
"The U.S. invaded Iraq in March '03. Stocks rose 2.3% the following day & 30% on the year."
Here are the exact numbers if you are interested (mined were approximate, based on 3 months candles)
So why these orgies over dead bodies?
My best guess: it's unrelated. Traders are cold blood employees. They are paid to do a job: maximize returns.
The market reacts to something else: fiscal & monetary policies.
Since the moment of the Russian 🇷🇺 invasion of Ukraine 🇺🇦, tech stocks ($NQ) had an incredible 9% rally:
So what changed? Monetary policy expectations.
As you can see, the market-implied probabilities decreased from a 50bps hike to a 25bps hike in March. Long term probabilities are also affected negatively.
5 years' real yields are also collapsing since the tensions escalated. This could have been a big driver of the equities melt-up.
You can read more about the relationship between real yields and market returns in this post:
I think that the market is right and that the Fed will yet do another policy mistake and raise rates less than they should.
Why do I say another policy mistake? Because the fed misunderstood the COVID crisis for a demand shock. In reality, it was a supply shock.
Trying to solve that by increasing demand resulted in out of control inflation. We're now in the exact same situation: a risk of an escalation of the supply shock.
As @Nouriel Roubini writes:
You can read his op-ed for an exhaustive view on the topic:
Furthermore, it could be incredibly disruptive for the food supply chain:
Russia 🇷🇺 is the top fertilizer exporter, Belarus 🇧🇾 is the 6th.
Russia 🇷🇺 is also the 2nd biggest wheat 🌾 exporter, tied with the entire European Union 🇪🇺.
Ukraine 🇺🇦 is the 4th.
At best, it is status quo, at worse it will trigger more inflation.
I don't see how further policy mistakes (not hiking) will help in the long run. Typical Central Bank panic.
They aren't able to adapt to an inflationary environment after years of "low-flation".
I ask you, how are further policy mistakes and quagmire good for stocks?
Recent events also show that it could end up being a lengthy and disruptive war, with neither side willing to give up. Let’s have a thought for the ones that will peril there.