Here lies the path from coronavirus to economic success

A stock market’s benchmark index is a blunt instrument with which to measure something as slippery and complex as a national economy. Boiling everything down to one number is obviously an over-simplification.

Even more so because, in today’s globalised world, where a share is listed is not necessarily a reflection of where a company earns its profits.

This is particularly so in an open economy with an internationally focused stock market like Britain’s

That said, the relative performance of the developed world’s main stock markets since the beginning of the year does still point to an interesting story.

If you had invested $100 on Wall Street last New Year’s Eve you would today have $97. ¥100 in Japan’s Topix index at the end of last year would be worth ¥90. €100 in a basket of European stocks is still valued at €89. But £100 invested in the FTSE 100 has fallen to a bit under £83.

This suggests investors do not share the optimism with which the Bank of England’s chief economist Andy Haldane last week described the current state of the British economy.

Alluding to the alphabet soup with which the shapes of the possible economic outcomes are being described, he said: “So far, so V.” In other words, we’ve endured a sharp fall in output but enjoyed a sharp recovery too. At the very least investors are suspicious that the V might morph into a W, where an initial V runs out of steam, suffers one or more relapses before eventually getting back on track.

There are a few reasons why our domestic stock market is right to be cautious. The UK has not had a good pandemic by any objective measure – excess deaths, for example. It is heading towards what looks likely to be an economically damaging Brexit at the end of the year. And the composition of the UK stock market is weighted towards some of the less attractive sectors right now – banks and energy stocks, for example.

Whether these headwinds are enough to justify Footsie’s significant underperformance over the past six months is a key question for UK-based investors, many of whom, due to home bias, will have enjoyed a much more subdued rally in recent weeks than their international counterparts.

Mr Haldane is careful to express less certainty about the immediate outlook for the economy than about the recent past. He is an economist, after all. So he sets out two possible scenarios for the second half of 2020, one of which suggests the stock market has got it about right, while the other implies a possible investment opportunity. It’s unclear, in his view, which is more likely.

Tale of two recoveries

The first path involves what he calls a negative feedback loop between higher unemployment and lower economic activity. This seems plausible given the “suspended animation”, to use the Prime Minister’s expression, in which the UK’s jobs market has been placed by the necessary but unsustainable furlough scheme that currently protects the livelihoods of more than nine million workers.

Once the scheme starts to wind down it seems inevitable that unemployment will rise sharply, perhaps back above the levels I witnessed when I dipped my toe into the jobs market after graduating in 1985 (and promptly went abroad, not liking what I saw).

The alternative path would see a positive feedback loop from higher spending back into lower unemployment. The thinking here is that companies will not make their furloughed workers redundant if they think that rising demand will force them to rehire them again in the near future.

Just as the fear of unemployment feeds the negative loop, the positive variant is fuelled by greater confidence in job security, higher earnings, less precautionary saving and more spending. As President Roosevelt said in the Great Depression, the only thing we have to fear is fear itself.

Of course, stock markets look beyond the immediate future so what happens next year and beyond also matters when assessing the value offered by the FTSE 100 today. Those who grew up in the 1930s were shaped by their early experiences, remaining cautious savers throughout their lives in a way that people born in happier times have not. The longer the downturn goes on the deeper the scarring and the more reasonable the market’s pessimism.

This is the backdrop to the speech this week by Rishi Sunak, the Chancellor, in which he will begin to set out how the Government intends to support the economy over the next few crucial months.

To date, the response by this government and others around the world has been massive – arguably much bigger, measured against the size of the economy, than the New Deal with which America rebuilt itself after the Depression.

If the V-shaped recovery is to avoid becoming a W, he must continue to think big and avoid the siren call of austerity and balanced budgets.

The fiscal measures to counter the effects of lockdown are already worth 15pc of GDP while the Bank of England’s balance sheet is more than twice as big as a proportion of economic output than it was after the Second World War. The bigger danger now is not spending a bit more but losing our nerve and retrenching too early.

If we stick with the task and attempt to grow our way out of trouble, investors will find plenty of opportunities in the months and years ahead.

The reality of emergency stimulus is that it is not all directed where it is most needed. Much of the spending by government and central bank will leak into asset prices as it did after the financial crisis.

That is why it is wrong to be too bearish at the moment and why the UK market’s underperformance, despite the challenges ahead, offers investors a relatively good starting point.

Tom Stevenson is an investment director at Fidelity International. The views are his own. He tweets at @tomstevenson63