In other words, the “inflationary power” of expanding the money supply got channelled by default into equity and bond prices.
The use of monetary policy to deal with economic crisis has therefore proved most beneficial to investors – particularly those with holdings in the sectors most directly related to the irresistible deflationary trends under way.
Noteworthy examples obviously include tech companies with no debt or even abundant cash flow, as well as healthcare providers that are making money on an ageing population and large, globally integrated firms that have powered the trend towards international supply chains.
Meanwhile, the shares of manufacturing companies and banks, which need a booming economy to be able to generate operating profits and invest for the long term, have been withering on the vine.
The upshot of this polarisation in equity-market behaviour is that so-called cyclical companies, whose fortunes vary with economic growth, have very little weight today in the major market indices.
In contrast, tech and healthcare names, whose share prices don’t reflect the strength of the economy, but rather its deflationary torpor, are now over-represented.
New normal?
So, what does today’s high-flying stock market tell us? Simply that investors who are positioned to take advantage of a sorry state of macroeconomic affairs are doing well.
Yet another piece has been added to the puzzle in 2020: Covid-19.
Though how the pandemic will evolve is anyone’s guess. Not only is it already accelerating existing deflationary trends, but it is also reshaping consumer behaviour, perhaps lastingly so.
How have markets adjusted to this extra dose of uncertainty?
First, as could be expected, investors have stepped up their positions in sectors that “like” the deflationary pressures created by economic uncertainty.
Second, they have focused, within those antifragile sectors, on companies whose profit margins are clearly being boosted by changes in consumer behaviour such as greater home working opportunities, video gaming, the cloud, e-commerce and a concern for the environment.
Third and last, responding to the unprecedented degree of uncertainty today (regarding the business cycle, inflation, politics and geopolitics, and exchange rates), they have shifted the rest of their holdings into another antifragile asset called gold – the traditional multi-risk insurance policy.
Since the start of the year, the two most lucrative bets, though they aren’t really bets at all, have been the Nasdaq Composite, which is weighted towards IT companies and has gained 25 per cent, and the Gold Miners Index, which is up 35 per cent.
