This morning I listened to the radio where somebody expressed a – I believe – common opinion. The opinion referred to an (at first sight) apparent correlation.
On the one hand, the so-called DAX index (a blue-chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange) is trading at an all-time high of over 14,000 points, the highest level recorded. On the other hand, the Corona pandemic (not only) in Germany worsen, and maybe the worst is yet to come.
How does that fit, that the most prominent german companies never were more valuable while society and economy are under pressure from required measures to contain the pandemic?
The opinion on the radio was that this odd relation shows that capital and the real world are detached, that capital gains from the pandemic, that equity owners gain from the current situation.
But something is missing there. As at almost any market, price is a result of supply and demand. So it is at stock markets. But there is something special. You buy stocks in the hope of rising rates. That means that you buy stocks when you expect them to rise.
Therefore, at stock markets, the share price reflects less the companies’ common economic situation but their prospect, the future’s assumed profits.
So is the DAX index. The current all-time high isn’t related to the quite depressing situation these days. But it is a statement about the future. Demand on shares is high (that is why the price of the shares rises), and this rise reflects the optimistic outlook of the stock traders. They expect a prospering economy, presumably because of the best hope that vaccines will end the pandemic this year.
In this sense, high stock prices under challenging times are not a demise sign but of a bright future.