Everything Is Awful. So Why Is the Stock Market Booming?

And Saudi Arabia and Russia apparently reached a truce to reduce oil output, causing a rally in oil prices, which is good news for oil companies that have been hammered by plunging prices of crude.

Finally, the gush of money into safe investments, both from private savers and the Fed, is pushing down longer-term interest rates. That makes even weak or uncertain future earnings for shareholders more appealing than they would have been when interest rates were higher.

But just because there are reasons for the stock market rally doesn’t mean those reasons are good ones.

Stock prices are always based on what the world will look like in the future, not the present. In the global financial crisis, stock prices bottomed out in March 2009. The economy did not begin expanding again until July, and the unemployment rate would not peak until October.

But current market pricing suggests that investors are counting on a speedy rebound.

“If this doesn’t go on much longer than expected, if it really is a three- to six-month event from the time we turned the switch on the economy off to when we turn it on, then markets have already accounted for that and are looking ahead,” said Jim Paulsen, chief investment strategist for the Leuthold Group. “It could be that the virus stays hot, and this situation stays in place for three or four quarters, and we’re not priced for that.”

In effect, financial markets are betting that there is some reasonable approximation of normal on some foreseeable horizon.

The current pricing assumes that a cascading series of failures will not happen. That widespread job losses and drops in income won’t cause the mass closure of businesses. That people will have a job to go back to and will be willing to spend when the public health crisis ebbs.

Article source: https://www.nytimes.com/2020/04/10/upshot/virus-stock-market-booming.html