COVID-19 Driving Stock Market Higher Than 1 Year Ago?

COVID-19 became a serious concern for wider public in the USA somewhere between February and March of 2020. Today on May 16, stock markets in the USA are optimistically higher than a year ago while most of the country is still under strict lockdown restrictions.

S&P 500 May 16, 2019 — May 16, 2020

Uncertainty around the virus is still high and vaccine seems to be 12–18 months away. The closest region approaching herd immunity is NYC with 20% spread of the virus among the population. But that is nowhere near herd immunity requirements. “Experts predict at least 70 percent of the population will need to be immune to the virus in order to achieve herd immunity.

Most economics charts worldwide have “broken” websites because y-axes do not reach low enough. Such is the extend of the ongoing economic pain.

Global PMI: 39.8

JPMorgan Chase’s snapshot of the health of manufacturing around the world

Bloomberg Global PMI: 39.8. Updates monthly Last May 4, 2020

U.S. Employment: −20,537K

Bloomberg U.S. Employment: −20,537K. Updates monthly Last May 8, 2020

U.S. consumer spending: −7.5%

Bloomberg U.S. consumer spending: −7.5%. Updates monthly Last April 30, 2020

German Ifo: 74.3

The leading indicator of health in the euro area’s largest economy based on a survey of ~7,000 executives in German manufacturing, services, retail, wholesale and construction companies.

Bloomberg German Ifo: 74.3. Updates monthly Last April 24, 2020

How do we make sense of the stock market’s optimistic behavior during these strong headwinds?

There are only 2 unconvincing answers that come to mind:

  • Stock markets are forward-looking and all the damage of the virus is behind us.
  • FED can support the markets indefinitely by buying everything publicly traded using printed money. The following chart shows the FEDs assets currently sitting at $6,934,227,000,000, or $6.9T, which have “broken” the y-axis in the opposite direction.
Board of Governors of the Federal Reserve System (US). Total Assets. Retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/WALCL, May 16, 2020.

The first explanation suggest that there are many brave people betting against the virus. The second suggests that future inflation will never become a factor. Neither is convincing.

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