Financial markets have a history of looking through bouts of civil and political unrest. Today, investors are focused on the reopening of economic activity in the US, rather than the turmoil engulfing many American cities since last week’s killing of George Floyd, an unarmed black man, in police custody.
Investors can point to history to justify their calm. At the end of a bloody 1968, the S&P 500 finished nearly 11 per cent higher on the year, including the reinvestment of dividends, despite the assassinations of Martin Luther King and Robert F. Kennedy, actions that triggered civil and political turmoil. The S&P also finished 1992 in positive territory after riots following the acquittal of Los Angeles police officers who had beaten Rodney King, another black man.
Towards the end of the last century, the impeachment trial of President Clinton was accompanied by the S&P 500 rallying more than 20 per cent in both 1998 and 1999. More recently, the Occupy Wall Street protest that started in Manhattan’s Zuccotti Park in late 2011 was accompanied by a 4.5 per cent climb in the S&P 500.
These examples illustrate how equity prices reflect a focus on the underlying economic and corporate earnings narrative at the time, rather than societal or political upheaval.
“History shows markets look through many sorts of tumultuous events and have done so for decades,” says Nicholas Colas at DataTrek Research, which provided the annual S&P figures. “That may seem counterintuitive, and perhaps not even fair, but it’s absolutely true.”
Wall Street’s confidence in an approaching economic recovery this year, vindicating a sharp rebound in asset prices from their lows in March, suggests that the worst of the Covid-19 shock is behind us. Market sentiment is tied up with long-term expectations for growth and, in spite of skyrocketing unemployment and intense pressure facing small businesses, investors are intent on getting ahead of an expected new business cycle. Hence a stock market that has rebounded by a third in value since late March, leaving the S&P 500 within 10 per cent of its February peak, despite cumulative US jobless claims filings exceeding 40m.
Investor optimism also reflects massive support from the Federal Reserve and fiscal stimulus from Washington. Over a decade of cheap money from the US central bank has been a boon for asset prices at the same time that it has intensified income inequality. Meanwhile, deep-seated and truly depressing social issues in the US have been exacerbated by a double-whammy of a health crisis and an economic lockdown that has particularly hurt those at the lower and more vulnerable parts of society.
This ultimately raises an important question for investors. Will the vast amount of stimulus fill the deep economic hole produced by the pandemic? Wall Street is certainly expecting an economic bounce, but investors should also note the flattery at work. Given the extent of the collapse in economic activity in recent months, any rebound in measures of activity as lockdowns ease will look impressive because it is coming from such a low base.
Over the longer term, a period of elevated unemployment beyond 10 per cent, accompanied by business failures, will only intensify civil unrest and frustration towards governments over their approach to the pandemic and the restraints imposed by lockdowns. And it is possible that the protests will themselves lead to a new wave of infections that requires economically painful measures to be extended. This kind of environment raises the prospect of cautious consumers saving more, thereby weighing on a broader economic recovery.
There is some acknowledgment that Wall Street will reconsider matters should civic unrest delay the resumption of economic activity. “If protests or political spillover start to hurt consumer confidence, that would spell lower stock prices for a longer period than a week or two,” says Mr Colas.
The likelihood of a tumultuous summer on main street as protests continue may not deter Wall Street from its bullishness about the post-Covid economic rebound. A slow recovery that drags on beyond the summer, mirroring the period after the financial crisis, is another matter. The protests on US streets reflect, in part, a call of economic distress. Ultimately, Wall Street may find itself on the wrong side of history.