Are markets efficient?

Written by Juan Palenzuela, Associate

Edited by David Gaffney, Partner

Good morning,

For economists, the timeline of the pandemic has been a fascinating way of revisiting a decades-old debate. 

Covid-19 entered the global consciousness in the early part of this year. The virus was spreading rapidly, and on 30 January, the WHO categorised it as a “Public Health Emergency of International Concern” (PHEIC). 

Strangely, it wasn’t until late February that investors’ worries started to become reflected in the markets. In the US, the S&P500 grew by nearly 4.5% in the three week period from the PHEIC declaration until 20 February; while in the UK, the FTSE100 rose by two per cent. In that same period, confirmed cases of Covid-19 grew by a factor of almost seven and deaths by a factor of 9.5.  

Shortly after, the S&P dropped nearly 34% to a new low on 23 March. 

How is it possible that investors, most of whom professionally research companies and markets and specialise in discounting future risks, were unable to see this? Even more perplexing, markets bounced back swiftly by 30 April, by roughly 30% in the US and 22% in the UK despite growing concerns around the pandemic. 

This roller coaster is a challenge to explain for traditional economists who believe in the efficient market hypothesis. If the markets are truly smarter than anyone, given that they incorporate the insights of the smartest investors, then why are they so volatile? For those economists that do not believe in the theory, this is yet another strong piece of evidence against market efficiency. 

There are two things, however, that both groups agree on. The first is that investors make errors when interpreting the information available to them, either underestimating or overestimating things, or both. Second is that the propagation of those misled narratives can be as fast as the spread of a virus, and they can become self-fulfilling. 

The key element of disagreement is whether arbitrage is possible. Can investors really time the market in the end?  

The effects of this pandemic on global markets are unlikely to resolve this fundamental economic debate, but we can already be sure that it will provide an abundance of fuel for the discourse to rage on for some time to come.


Representatives from the WHO said yesterday that they had received no evidence to support the claim that Covid-19 originated in a laboratory, a theory promoted by US officials in the Trump administration, among others. On Sunday, America’s secretary of state Mike Pompeo claimed the US had “enormous evidence” to back the theory. 

New Zealand’s prime minister, Jacinda Ardern, announced yesterday that her country’s borders would remain closed for “a long time” to prevent the emergence of a second outbreak. The country has recorded no new cases this week so far. 

A beta version of a contact-tracing app was launched yesterday by the UK government. The app, which will be voluntary to use, forms part of the UK’s ‘Test, Track and Trace’ strategy, and will be piloted in the Isle of Wight first to assess whether it is an effective strategy in containing the infection. Other countries such as Singapore and South Korea have already launched similar digital contact-tracing apps, and they have been useful in identifying those at risk as lockdown measures start to be lifted. 

The app deploys a centralised approach, meaning there is a central computer which works out which phones have matched and will receive an alert. This is different to the decentralised model used elsewhere and has raised concerns about privacy issues

Business and economy

Trade talks between the US and the UK resumed yesterday, via videoconference,  as the two countries look forward to a trade deal ahead of Britain’s departure from the EU. Liz Truss, secretary of state for international trade, told The Guardian yesterday that the deal could help the economy bounce back from the Covid-19 crisis by making it even easier to do business with America. 

Volkswagen warned that the cost of crucial car components has risen sharply because of the pandemic, putting further pressure on profits as the industry enters a deep recession. The company also revealed that some parts makers, which are operating at a fraction of their capacities, were passing on their increased expenses to manufacturers. 

Revolut is reportedly looking to use the proceeds of a recent fundraising round to acquire rival fintech businesses that have been hit by the coronavirus pandemic. Nikolay Storonsky, chief executive, told reporters that there was “a real opportunity” due to the crisis. 

Columns of note

Machine learning and algorithmic economics could be vastly helpful to generate novel insights for policymakers and boost recovery in the aftermath of the pandemic, argues John Thornhill in the Financial Times. 

There is a strong case for deeply negative interest rates, backed up by measures to prevent cash hoarding by financial firms, argues Kenneth Rogoff, professor of Economics and Public Policy at Harvard University, on the Project Syndicate opinion site. 

Source: The Times


What happened yesterday?

Global equity markets fell sharply yesterday after President Trump’s US government ramped up its alternative theories about China’s implication in the current pandemic. 

In the UK, the FTSE 100 ended the session down 0.16% at 5,753.78, and the FTSE 250 was 1.22% lower at 15,951.68. 

In Europe, meanwhile, the Stoxx 600 was trading 2.65% lower to 328.44, alongside a 3.64% fall for the German Dax to 10,466.80, while the FTSE Mibtel was down 3.70% at 17,035.61. 

In company announcements, Superdrug announced in a letter to landlords yesterday that it intends to reduce its lease payments despite being able to keep a number of stores open during the Covid-19 outbreak. 

A spokesperson for Rolls-Royce, meanwhile, stated that the company intends to update employees by the end of the month “on the impact of the current situation on the size of our workforce”. 

What's happening today?

Trading announcements



4imprint Grp.

Anglo American


Johnson Serv.

Interim dividend payment


Schroder Inc

UK economic announcements

(09:30) PMI Services

(09:30) PMI Construction

Int. economic announcements

(08:55) PMI Services (GER)

(08:55) PMI Composite (GER)

(09:00) PMI Services (EU) 

(09:00) PMI Composite (EU) 

(10:00) Producer Price Index (EU)

(13:30) Balance of Trade (US)

(14:45) PMI Services (US)

(14:45) PMI Composite (US)

Source: Financial Times

Did you know?

99% of all mammals can produce their own Vitamin C. Humans, guinea pigs and bats belong to the one per cent who cannot.

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