Most fund managers went into the pandemic holding the wrong companies. As the spread of the virus and the resultant economic carnage became increasingly apparent, many dashed to cash and other safe haven investments.
Unfortunately, this only meant that the stockmarket recovery was missed. The results have not been great, with the average fund within the global equity sector underperforming the market.
Rather than go back to the drawing board and critically assess what went wrong, many investors sought to take the easier route and pass on the blame. "The Fed is propping up market" bandwagon was a rather timely and conceivable explanation. Yet if this was the case, why are European markets still deeply troubled, despite similar quantitative measures in Europe?
Other managers have been more creative and absurdly suggested that droves of retail investors or speculators buying up fractional shares have been pushing the US stockmarkets higher. This is hard to swallow considering the very modest percentage of total daily volumes these market participants cumulatively account for.
What we think we know is all wrong
Many are flabbergasted as to how the stockmarket could recover so quickly despite the clear economic distress. We are perplexed as to how and why so many investors have been expecting the market to follow the economy despite 90 years of empirical data which clearly shows that there is no meaningful relationship between the two.
While central bank intervention can help market sentiment in the short run, it is a misconception that central bank intervention has any material effect on the stockmarket performance over any meaningful length of time. According to data from the not-insignificant economist, Robert Shiller, the S&P 500 index delivered an annualised gain of 13.3% over the last decade.
Despite the supposedly Fed-induced rally, 10.2% of that 13.3% return is corporate earnings growth and a further 2.3% is attributable to dividends. The multiple expansion accounted for only 0.8% of the return. Decades of empirical evidence further support these findings. Growth in earnings, cashflows and dividends are the primary drivers of returns over time.
Furthermore, for those who are thinking that monetary policy has been behind the growth in earnings, this is not the case either. And no, the growth in earnings per share has not really been fuelled by buybacks as is commonly perceived. In the US, company earnings have grown 9.4% per annum, just under the 10.2% earnings per share growth.
This is why, despite similar accommodative measures in Europe, poor earnings growth has weighed on the performance of its aggregate stockmarket.