Do the markets scare you right now?
Photo: Pxfuel. CC0.
Watching the market gyrate as we digest results from the economy, surging Covid-19 cases, the election, corporate layoffs, racial tensions, economic stimulus, and you-name-it can be exhausting. Where do you start; where do you finish? Every day brings some new development, and they all seem to ripple through stocks, bonds, currencies, commodities, any other type of investment you might think of. How do we make sense of all these connections?
Strange as it might seem, one way to approach the current situation was outlined about 90 years ago by no less than Albert Einstein. He predicted a phenomenon known as quantum entanglement and said that it was “spooky.” In essence, quantum entanglement posits that if two particles are created by the same event, what happens to one will automatically affect the other – even if they are at opposite ends of the galaxy. This “action at a distance” seems to violate the laws of physics, but it has since been verified experimentally with photons, electrons, and even small molecules.
The discovery led to debates at the time about the fundamental nature of reality. How can actions in one place affect something totally removed? It seems to require that some sort of “information” travel faster than light. Scientists have since come up with various models to explain entanglement, and engineers now use it in various applications, and it may explain all kinds of other phenomena, even the nature of time itself.
Source: Wikipedia. CC0.
Entanglement makes sense if you see the basic building blocks of the universe – photons, quarks, electrons, etc. – as all elements of some deep, underlying structure. What happens in one portion cannot be considered independently from everything else. This seems almost mystical, except that it can be described with sophisticated mathematical equations. There are no potions or spells or spooky mysteries, the particles are all “part of the main.”
In the same way, the global markets are all entangled. Stocks affect bonds which affect currencies which affect oil prices which impact gold which affect stocks again. This seems roundabout, but they’re all emanations of the underlying economy.
Stocks represent ownership of the largest companies in the world; a few companies have shown that they are essential for the economy to continue to function. It seems like we’re all on Zoom calls every day; “Zoom fatigue” is a real thing – and as universal as “making Xerox copies” was 30 or 40 years ago. Bonds are a source of stability, and when stability is in short supply, it makes sense that there would be excess demand for more bonds. Commodities are what make the ‘’real” economy go – oil, copper, lumber, grains. With the economy adjusting so rapidly to the pandemic, it makes sense that they go every which way. Oil has fallen dramatically as travel collapses, but copper and lumber have gone the other way as remote homebuilding booms.
Chart of Equities, Interest Rates, Commodities, and the Dollar. Source: Bloomberg.
No matter which way they go, they all depend on the economy. And the economy, in turn, will hinge on what happens with the coronavirus. Before this year, economies around the world were expanding at a decent clip. Once the pandemic has been addressed, the same economies will continue to expand.
On that front, we should all be encouraged. Despite the recent surge in Corona cases around the world – and there have been few exceptions – advances in testing, treatments, and vaccines continue. Germany stands ready to deliver millions of doses as soon its prime candidate is approved, possibly in December. The biotech firm Moderna says it expects to know if its innovative RNA-based vaccine works by next month and is preparing a global launch, having already received $1.1 billion in payments from governments around the world.
So don’t get spooked by the markets. There’s always volatility when we see change. Soon, we can hope, the change will be for the better.