The world is in recession. Why is the stock market reaching ever higher?

recessionCurrent World Bank forecasts indicate that the Covid19 recession will be the deepest since WWII and the Treasury’s forecaster has suggested that it could take until the end of 2022 for the British economy to return to its pre-coronavirus peak.

However, global stock markets seem to tell a more positive story. Markets are rallying across the world and have been so doing since their mid-March trough, with the US stock indexes leading the charge. Today, some markets – like the S&P 500 – are close to fully erasing their recent losses.

February and March were difficult months for stock market investors – with the sharp declines the markets were showing and wider economic chaos, sleepless nights were aplenty. Since then the stock markets have generally been positive. Many investors’ portfolios are close to their pre-coronavirus levels.

The divergence between economic news and stock market performance

While stock markets are closely related to the economy, they are not the economy.

Stock investors look forward, beyond present conditions, into the future. And at the moment they are taking an optimistic view.

There are several reasons for this.

Firstly, governments have responded with large economic stimulus packages. In Britain, we have had the furlough scheme, loans to support businesses and support for the self-employed. More recently, Rishi Sunak announced a further support package worth up to £30bn, which included measures to protect jobs, help younger workers and encourage spending.

As long as governments continue to support the economy, many investors will be willing to look beyond adverse economic headlines.

Secondly, the medical news around coronavirus is a bit of a convoluted story, but one which does show promising signs for investors.

While the virus seems to be continuing to wreak havoc around the world with more cases and fatalities each day, the news appears to be reasonably positive on vaccine development and other treatments. If a vaccine is available for mass distribution in early 2021, life may return to normal sooner than expected.

However, it’s not a foregone conclusion that the stock market surge will last.

A second wave of coronavirus could require countries to implement stricter social distancing measures that would further dampen consumer spending. And there’s a chance that global finance ministers will not be able to extend the kind of economic support measures offered during the initial lockdown.

Events like these would likely damage investor confidence in the future, causing stock markets to fall once again. However, given the fact that many major economies are making a ‘V-shaped’ recovery, we’d say the prospectus for investors is positive.

Sources
https://blogs.worldbank.org/opendata/understanding-depth-2020-global-recession-5-charts
https://www.businessinsider.com/why-stock-market-rising-despite-coronavirus-pandemic-higher-us-cases-2020-7?r=US&IR=Th
https://www.cnbc.com/2020/06/03/understanding-the-huge-disconnect-between-the-stock-market-and-economy.html