Is the Stock Market’s Response to COVID-19 Optimistic or Just Plain Nuts?
What accounts for the apparently dramatic mismatch between the stock market and the economy?
Unemployment is the worst it has been since the Great Depression. Goldman Sachs says it could hit 25 percent. Gross domestic product could fall by 42.8 percent, according to the Federal Reserve Bank of Atlanta.
Yet as I write this the Standard and Poor’s 500 Index of large U.S. stocks is off by 9 percent or so from its 2019 year-end close. That is significant, but less dire than the predicted decline in GDP or the rise in unemployment.
The journalists are having a hard time figuring it out.
“Have the record number of investors in the stock market lost their minds?” asks a New Yorker headline. The article paraphrases the Yale economist Robert Shiller, a staple of such articles, who, The New Yorker reports, “issued a warning to investors: being in the market at this point is much riskier than it appears.”
The business cable news channel CNBC refers to “the puzzle that is the current relationship between the U.S. stock market and the underlying economy.”
Quartz, a business news website, reports, “If forecasts for a 30 percent to 40 percent decline in gross domestic product turn out to be accurate, then the US stock market’s valuation is more disjointed from the underlying economy than it’s been since the dot-com bubble in 2000.”
Paul Krugman, the New York Times columnist and Nobel-Prize-winning economist, writes of “the disconnect between stocks and economic reality.”
Some of the resilience in the stock market is driven by technical factors such as automated rebalancing of target-date retirement funds or other portfolios that have a fix
Article from Latest – Reason.com