The Republican nominee for president is just the latest to criticize the easy money policies of the U.S. Federal Reserve and other central banks. Donald Trump is at the populist end of the critics: low rates, he fretted this week, penalize savers.
Well, yes: Part of the point is to discourage saving and encourage consumption. More coherent critics worry that low rates damage the economy by sustaining companies and banks which ought to be driven out of business in a zombie state, so limiting the recycling of capital back to more deserving, faster-growing companies. The fear is that the creative destruction identified as vital to capitalism by the late Joseph Schumpeter has been put on hold.
If the undead are haunting the stock exchange, it might show up in performance: the best stocks will be cramped and the worst do better than they otherwise would. Exactly this seems to be happening.
One simple way to see it is the gap between the best and worst-performing sectors in the SP 500. This chart shows how the gap has been much narrower since the post-Lehman interventions eight years ago than it typically was beforehand, and has just reached its lowest since late 2006.
And here’s the performance of the best and worst sectors. Note that this is recalculated every day, so the best performing sector in one period isn’t necessarily the best in another. Over the past year the best performer was the utilities sector, up 16.8% amid the hunt for yield, while the worst performer was the healthcare sector, hit by political controversy and a ban on shifting to low-tax jurisdictions.
A zombie economy wouldn’t necessarily show up among the large U.S. stocks which make up the SP 500, of course. These are primarily beneficiaries of easy money, big companies which have already made it and have easy access to borrowing. The real losers are the start-ups and small businesses which find it harder to borrow, and don’t make it into the SP.
Still, it is notable that the gaps between the best and the worst sectors are small, and the same is true globally.
This isn’t just about sectors swinging in and out of fashion rather less than usual. A similar pattern is visible in the gap between the best and worst performing stocks. Numbers run for me by Andrew Lapthorne, head of quantitative equity research at Société Générale, compare the top and bottom 10% of stocks (using the median of each decile to damp the real extremes).
And here are the top and bottom – note that while the gap is narrow, it’s still 71 percentage points over the past year, leaving plenty of scope for stockpickers who get it right to do fabulously well. Sadly, few do.
The flattening of the gap between the best and worst performers is consistent with the idea of a zombiefied market, but doesn’t prove it.
Another possibility is just that investors are focused on monetary policy, which has been a lot less volatile than the economic and earnings data which usually drives prices.
Even such a switch of focus is a cause for concern, though. If investors are picking between companies and sectors less than they usually do, then the stock market is failing in its primary job of allocating capital – or at least providing a price guide for the allocation of capital – to the companies which can best make use of it.
Individual investors may not care too much, particularly those who made almost 17% on utilities over the past year. But if the invisible hand of the market is suffering from zombie putrefaction, the economy will be less dynamic than usual.