{"id":124523,"date":"2021-03-23T09:57:33","date_gmt":"2021-03-23T08:57:33","guid":{"rendered":"https:\/\/www.erasmusmagazine.nl\/en\/?p=124523"},"modified":"2025-12-19T11:25:30","modified_gmt":"2025-12-19T10:25:30","slug":"why-stock-markets-are-doing-really-well-despite-corona","status":"publish","type":"post","link":"https:\/\/www.erasmusmagazine.nl\/en\/2021\/03\/23\/why-stock-markets-are-doing-really-well-despite-corona\/","title":{"rendered":"Why stock markets are doing really well, despite corona"},"content":{"rendered":"

Now that the pandemic has been with us for a year and the global economy has been dealt an unprecedented blow, the stock exchanges are recording record highs and people have more money than they know what to do with. So why aren\u2019t we experiencing a financial crisis yet? \u201cI would not advise people to start investing now,\u201d says Professor of Finance Mathijs van Dijk.<\/p>\n

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\n\t\n\n<\/svg>\n<\/span>\n\tImage by:<\/span>\n\n\t\t\t\n\t\t\t\t\t\t\tBas van der Schot<\/a>\t\t\t\t\t<\/span>\n\t<\/p>\n<\/figcaption><\/figure>

If you were forced to make a choice, would you describe the stock market as the driving force of the economy, or rather as a casino?<\/strong><\/p>\n

\u201cI think I\u2019d pick the former. I think the stock market \u2013 like the entire financial system, including banks \u2013 plays an important role in financing economic activity. Companies can raise money, use it to invest, then grow. But of course, there\u2019s a different side to it, as well. Once the funds have been raised, the investors will start trading those shares among each other. And the value of the shares generally doesn\u2019t have immediate consequences for the company, except for things such as the executives\u2019 remuneration.<\/p>\n

\u201cThe comparison with a casino is apt in a way, because the stock market is unpredictable, just like a casino. So you could say it\u2019s just speculation. But the ironic thing is that this unpredictability is also a sign that the stock market is actually working very well. The value of a share is determined by the company\u2019s current profitability, the amount of dividend promised and long-term expectations. The long term is uncertain, but updates are released quite regularly. Which is unpredictable by definition.\u201d<\/p>\n

You seem to be implying that there is a relation between the value of a share and the value of a company.<\/strong><\/p>\n

\u201cThere most definitely is. It\u2019s not a perfect relationship and there are definitely moments where things seem quite unaligned. But the stock market isn\u2019t completely detached from reality, as some people will tell you.\u201d<\/p>\n

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\n\t\n\n<\/svg>\n<\/span>\n\tImage by:<\/span>\n\n\t\t\t\n\t\t\t\t\t\t\tBas van der Schot<\/a>\t\t\t\t\t<\/span>\n\t<\/p>\n<\/figcaption><\/figure><\/div>

One of the companies critics say is being hugely overvalued is Tesla. It\u2019s a promising company and Elon Musk is doing revolutionary stuff. But is a share price increase from 30 to 800 dollars within a year justified?<\/strong><\/p>\n

\u201cTesla is a trendsetter and has done brilliantly in the past few years, but I have some misgivings about its share price. We know that people are sensitive to great stories and apt to lose sight of reality on occasion. The best example of this is the dot-com bubble of the late 1990s. Tesla doesn\u2019t sell that many cars or make huge profits. And just about any car brand has by now begun producing electric cars. The current share price only seems justifiable if they will continue to be dominant in the market for many years (just after this interview, Tesla\u2019s share price plummeted and the company\u2019s trade value was reduced by more than 300 billion<\/a> \u2013 ed.<\/em>).\u201d<\/p>\n

The IMF has issued a warning, saying that we\u2019re facing a split reality. To what extent are we witnessing the birth of an economic bubble?<\/strong><\/p>\n

\u201cIt\u2019s very hard to say for sure. In principle, the value of a share represents all the dividend that will be paid out in future. That future might just last a few hundred years, so it\u2019s very hard to include this in the share price. But it\u2019s obviously very strange that the stock markets are doing better than ever even though the economy has just had a disastrous year. I would not advise people to start investing now.\u201d<\/p>\n

We could go short, right?<\/strong><\/p>\n

\u201cHistory teaches us that all things that go up spectacularly must come down at some point. You can place bets on the fall of a share price. However, the question is whether you can time it. I\u2019ve been conducting research on stock markets for twenty years, but I don\u2019t actually buy shares. The tulip bulb bubble<\/a> of the seventeenth century, which saw certain types of tulip bulbs sold for amounts that could buy you a nice house on a canal, lasted a few years, as well. Going short can end up costing you an absolute fortune if share prices keep rising for a while.\u201d<\/p>\n

How is it possible that stock markets are doing so well even though the economy has taken an absolute hammering?<\/strong><\/p>\n

\u201cThere are several causes. First of all, many companies are receiving government support, because it\u2019s very cheap for governments to borrow money. As a result, the blow isn\u2019t nearly as tough. We learned in the previous financial crisis that this is a genuinely good idea. In addition, we expect that, once the economy opens up again, demand will be tremendous, just to make up for the lockdown. Furthermore, people have spent a lot less in the last year, which has resulted in a huge investment boom, particularly among private citizens. This is in line with a global trend whereby people are saving a lot of money, the so-called savings glut. We\u2019re talking about an enormous amount of money. We did see share prices fall in March of last year \u2013 they lost about one-third of their value \u2013 but in the end, that money must be spent in some way or another.\u201d<\/p>\n\n\t

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