At the onset of the coronavirus crisis, Wall Street had a meltdown. Stocks plunged amid fears of the disease’s spread and its potential impact on the global economy. But in recent weeks, the market has recovered — the S&P 500 is hovering around where it was last fall. The U.S. jobs report for April was a stunner as unemployment hit its highest level since the Great Depression. In the harshest downturn for American workers in history, employers cut an unprecedented 20.5 million jobs in April, and the unemployment rate more than tripled to 14.7%. Joblessness now stands at its worst level since the Great Depression, as the coronavirus brought the economy to its knees.
Yet, the market is inching up everyday and hardly reflecting the pain that millions of Americans are feeling on the ground. Why is there a complete decoupling between the economy and stock markets?
Future Wealth’s View
The obvious answer is that investors don’t really have a lot of places to go with their money with interest rates close to zero. And then, there’s a fear of missing out, retail investors are playing the markets while in quarantine to have their one day in the sun, when they can boast to their friends that they were buying when everyone else was selling.
But the truth is, there’s no guarantee this market rally will last, nor that investors have it right. The reality is that no one really knows how this is all going to end and the most simplistic answer is that this rally makes zero sense.
On the flip side, the Fed likes what it sees in the market. Since late March, the central bank announced a series of sweeping measures designed to help stabilize the economy, including plans to buy both investment-grade and high-yield corporate bonds. The Fed’s maneuvers have injected an enormous amount of liquidity in the market and restored faith of both private corporate bond buyers and equity investors that the central bank is there to back them up.
As long as the Fed’s music is still playing, Wall Street will keep dancing.