One slogan of the COVID-19 crisis has attracted less publicity than certain others, despite its apparent roaring success. ‘Whatever it takes’ was not aimed at directly at saving lives, but at preserving the economy and the slogan has been (almost) too successful, according to Professor Bige Kahraman of Oxford’s Saïd Business School.
Speaking at the end of last month, the Associate Professor of Finance said that, in mid-March, the Federal Reserve chair, Jerome Powell, let it be known that the US central bank will do – whatever it takes – to keep the markets from going into freefall.
‘That was critical,’ said Professor Kahraman, to what followed – a sustained stock market run, in the face of bad news heaped upon bad news. While appalling economic indicators have emerged, with many economists and politicians warning of the biggest downturn in 300 years or 90 years or 30 years, the markets have gone up and up.
‘It is surprising,’ said Professor Kahraman. ‘From early April, the market just rallied. It was unexpected and it was against expectations. It was only one month after big market falls.’
In late February, the FTSE 100 had been standing at more than 7,000, but, by 12 March, it had crashed more than 24% - some 1,700 points to 5,230 over fears about COVID-19. Similar falls were seen on Wall Street as the Dow Jones average fell some 7,000 points from more than 27,000 to fewer than 20,000.
Professor Kahraman maintained it was Mr Powell’s reassurance that made all the difference. The Fed chair had begun by cutting interest rates – to less than zero. But received a distinctly frosty market response. But the US bank chief then sent a strong signal to the market that the US central bank would do – whatever it takes. And he was soon followed by UK Chancellor Rishi Sunak – with a massive injection of capital into the UK economy and plans to protect jobs with the furlough scheme and businesses with loans.
Investors rushed into the market....To such an extent, it started to get a little out of control. There was a momentum that saw market rises, whatever the bad news
‘Everyone was expecting unemployment to rise,’ said Professor Kahraman. ‘But there was a very strong commitment from major players. [In addition to Chancellor Sunak’s move] In the US, Congress passed a high speed Bill, which saw a $3 trillion bonus for the economy....The Fed started purchasing assets, including even junk bonds and ETFs… As a result, the market did not do what it had done in 2008, despite the bad news.’
What followed next was most unexpected, Professor Kahraman maintained, ’Investors rushed into the market....To such an extent, it started to get a little out of control. There was a momentum that saw market rises, whatever the bad news.’
The markets have crept up steadily ever since Mr Powell’s intervention, so that the index has recovered by more than 15% in the US and the UK – in spite of the dire economic warnings. At the end of May, the FTSE reached more than 6,200, while the Dow Jones went over 25,000 points – on lockdown-easing news.
Another factor in the market optimism, Professor Kahraman said, is that, although there are expected to be some closures, as firms cease trading - others will move into that space, ‘Some firms will fail but others will acquire their business, which will mean market concentration – which is good for profits. If they manage to survive, there could be higher profits for firms in future.’
We don’t have the same structural problems of the Great Depression. Europe was going into a slowdown, but this is an external shock [In the UK and the US] and the recovery should be fast once the treatments and vaccines are developed
And, said Professor Kahraman, ‘Although many industries have suffered a very negative affect, others have been boosted, particularly tech firms. This has been good news for them in terms of business.’
But, she warned, ‘This [longer term government fiscal stimulus packages] is not sustainable.’
Government bail-outs cannot be open-ended. However, Professor Kahraman does not believe we are heading towards a Great Depression-style slowdown.
‘Although some of the figures may resemble the economy around the same time, we don’t have the same structural problems of the Great Depression. Europe was going into a slowdown, but this is an external shock [In the UK and the US] and the recovery should be fast once the treatments and vaccines are developed.’