There are two main reasons why this is the case. Firstly, significant economic stimulus shows that there is an implicit guarantee that Governments – in the US and beyond – will limit investors’ risk no matter how the economic recovery plays out. Consequently, the periodic glimmer of positive news fuels investors’ optimism that things can only get better.
The direction of the stock market is always determined by a complicated mix of hard data and investor psychology. The price of a stock is based on how much money investors think a company can make in the future. This shows us that investors care much less about the actual facts in today’s headlines, and more about what kind of picture those facts paint about the coming year.
To investors, it’s abundantly clear that the American economy is already in deep recession with more than 20 million jobs wiped out in a little more than a month – corporate profits collapsing are therefore hardly breaking news. When fresh economic reports emerge they provide little new information to investors; instead they are now looking for signs that the recovery is beginning.
Over the last two months investors have latched on to a series of indications that the worst-case scenarios for the economy could be mitigated.
The US federal government has acted quickly, with the passage of a roughly $2 trillion stimulus bill, the largest ever economic rescue legislation, in late March. Markets have also been given a lift by the Fed, which has pumped more than $2 trillion into financial markets. This stimulus has been the engine that has stabilised and driven asset prices higher.
Another slug of positive news that investors are factoring in comes from health data. The pace of new infections has slowed sharply in the US and Europe and investors are now looking to the gradual re-opening of economies.
Other updates, not least hopeful statements on the efficacy of potential vaccines and the potential of the remdesivir drug, have reinforced the narrative that things are improving.
It is clear that investors have extrapolated these shreds of good news into a brighter outlook for the economy. It is this outlook, together with the wave of fiscal and central bank stimulus, that has led to the divergence in market and economic performance.
Julian Broom, Chief Investment Officer