How can the stock market be experiencing such a recovery from its March plunge when much of the economic and Covid-19 data is negative? Many of you may be asking this. You wonder if it is irrational market behavior. This is the proverbial “good question.” There are various theories and explanations. FiveThirtyEight
One powerful explanation is sometimes referred to as “Powell’s Put.” Basically, “Powell’s Put” is a shorthand way of observing that Fed policy has become so supportive of economic growth and indirectly the stock and bond markets that it has put a safety net under market risk. Yardeni.com Not everyone views this as necessary or healthy. Washington Post
A second theory is that, as we have become fond of saying, stock investors look forward and are therefore projecting, rightly or wrongly, where they think the US and global economies will be six months, a year or two from now and see a strong recovery. Note that the US stock market historically has been a leading economic indicator of US economic performance.
Two more explanations include the valid observation that some parts of the economy are still doing well or at least noticeably better. Why should not stocks in those industries be performing well? One size does not fit all when it comes to stocks. It is also true that interest rates are so low that investors lack an attractive asset class alternative to stocks, safety of principal aside (as if safety can ever be an aside!).
A Word of Caution! None of the above theories, observations, or explanations provide any kind of a guarantee for an equity investor. Fed policy may change, or the Fed may run out of policy ammunition. Fed Chairpersons come and go. If earnings fail to pick up with reopening, investor optimism about looking out into the future can wane quickly. The economy could recede further dampening the performance of virtually all companies with few exceptions. Lastly, investor risk appetites shift too and could tilt again to safety of principal regardless of yield. Even though current stock market behavior may not be as irrational as it seems on the surface, there is no risk freebie for stock market investors.
- Covid-19 New Cases Surge in the US: With approximately 4% of the world’s population, the US has experienced around 25% of the deaths attributable to Covid-19. Moreover, the number of new cases continues to increase although the death rate is coming down. It is important to look at the data on a state by state basis. Maine and New Hampshire are among the states where new cases are decreasing. Massachusetts and New York are in the staying roughly at the same rate category. Florida is among the states where new cases are increasing. New York Times