Evaluating the divergence of the stock market recovery in the UK and America

In February and March, amid the growing realisation of the severity of the pandemic, the stock market experienced cataclysmic losses as huge numbers of investors pulled their money out. The result was the biggest stock indices in the UK and USA, like the FTSE 100, Dow Jones and the S&P 500, taking hits of over 30%. It is to the surprise of many then, that the largest American indices have made full recoveries to pre-crisis levels with a select few trading even higher than they started the year while in Britain the FTSE has failed to do so.

This divergence started around May after extensive gains at the end of March and throughout April as the UK and US governments announced the Furlough scheme and CARES act respectively. Since May, the American market has, in general, continued to trend positively while the UK market has stalled somewhat. This is in spite of the fact that both countries are struggling economically with increasing unemployment and lower levels of growth than they would have expected.

The difference in the nature of the reforms may be what has driven the growing disparity of major stock prices. The CARES act gave all Americans who were unemployed a $600 a week payment and gave those earning under $75,000 per annum a direct stimulus of $1200. These measures not only helped many families to pay bills but also, and perhaps equally importantly, gave new life to consumer confidence. A direct consequence of increased cash flow was the opening of millions of trading accounts in America during the pandemic as people sought to invest their stimulus money. Consequently, American stocks rose, especially tech giants like Apple, Amazon and Tesla.

This is in contrast to the UK where the main support for those at financial risk was the furlough scheme, which saw the government pay 80% of the wages of employees of whom companies could not afford to cover. This meant that many in the UK were operating on considerably smaller incomes during the pandemic and thus, it was self-evident that investment was lower as people sought to cut any spending on non-essential goods.

The American system succeeded in increasing the confidence of investors however, it must be asked whether the market is now actually overvalued. The CARES act allowed lots of people to invest when they otherwise wouldn’t have, and consequently, the market may be over-saturated.

The stock price of a company is supposed to reflect its true value, however, with the aforementioned surplus of cash and a growing culture around rash investing in America, with subreddits like Wall Street Bets and the increased popularity of day trading, it is highly likely that many American companies stock prices are in fact overvalued. Take Tesla for instance; it opened the year trading around $80 (using post share split prices) and currently sits above $400. What has happened in the past 10 months to make Tesla 5x more valuable? Unfortunately, this question does not have a truly substantial answer, meaning at any point it could be in line for a significant drop in the share price.

The fluctuations of this year are demonstrative of the impact of government policy on the overall prices of markets and going forward they must continue to protect jobs and support workers in the transition to a new economy. Only time will tell whether stocks in the US are overvalued and whether eventually, they may crumble!