Is the Stock Market's Response to COVID-19 Optimistic or Just Plain Nuts?

It may be a statement about the decline of the dollar, but the best-case explanation of the resilient stock market is that it is sending us a positive message about a rapid recovery of both public health and corporate profits.


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 fixed stock-bond percentage split. Low interest rates mean that investors seeking income have to seek out dividend-paying stocks, because savings accounts and government bonds are not paying out enough to live on. Investors who lived through the 2008 financial crisis may have learned that apparently dire times are a good moment for long-term investors to accumulate shares at low prices that will eventually recover in value. And stocks, after all, are a promise of a share in eventual future earnings. Most people think the world will recover eventually, the question is just how long it will take.

Stock prices, and dividends, are measured in dollars that are worth less in gold than they were before the virus outbreak, so anyone talking about stock values needs to be mindful of the unit of measurement. Betting that a share is worth more may just be a different way of betting that the dollar it was bought with is worth less; if IBM stock soars to $150 from $100, another way to say that is that the dollar that once bought one-hundredth of a share of IBM now only purchases one hundred-and-fiftieth of a share of IBM. It may be a statement about the decline of the dollar, rather than about the rise of IBM.

The most hopeful story, though, is that investors betting their own or their clients' money have a different, and more optimistic take on the coronavirus than do the newspaper editors and public health officials.

 The newspaper editors for the most part have an interest in emphasizing the most dire news. No one is much interested in reading articles about mild or asymptomatic cases of COVID-19. Those get buried deep inside the paper. People are interested in reading articles about otherwise healthy 40-year-olds—" cataclysmic spiral from avid skier, cyclist and runner to grievously ill patient," or the 14-year-old, "previously healthy… hospitalized with heart failure." You have to read closely to find the newspapers admitting that, as one doctor wrote in The New York Times. "It appears that most COVID-19 patients experience relatively mild symptoms and get over the illness in a week or two without treatment."

If the news providers have a click-driven financial motive to emphasis the worst news, the public health establishment and the politicians that employ them face similar temptations to emphasize the worst-case risks. That scares people into staying home. It reduces the transmission of the virus. And it justifies some of the more extreme and intrusive measures that have been taken, such as restricting gatherings and ordering the closure of schools, places of worship, playgrounds, and many businesses.

None of this is to question the sincerity or good intentions of these politicians or health officials. COVID-19 is a deadly disease, especially to elderly individuals and those with pre-existing conditions. It's possible that had the politicians and public health officials taken it less seriously, the virus could have spread more quickly and killed more people.

It's also possible that investors have a false bias toward optimism because they are in denial, unwilling to confront a grim reality. Investors may be deluding themselves, wishful-thinking style, that the coronavirus risk is less than it is. Maybe someone will look back six months or a year from now and accuse me, or today's stock-market investors, of that.

For now, though, it sure looks like the wisdom of crowds as expressed in the stock market has a happier outlook about the speed and degree of economic recovery than do the "experts" as filtered by the press. The best-case explanation of the resilient stock market is that it is sending us a positive message about a rapid recovery of both public health and corporate profits.

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  1. Let’s see….. an extra $3 trillion in circulation….. hmmmm

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  2. Is the Stock Market’s Response to COVID-19 Optimistic or Just Plain Nuts?

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  3. First time you’ve seen mass hysteria overcorrect the market? Look back to 2008.

    1. First time I’ve seen 2 “libertarians” cry about a stock market gain when we should be panicking. Not sure why Reason had to write 2 articles with this angle. Maybe they should realize the fundamentals prior to lockdown weren’t bad so a mass sell off due to a panicking tends to rebound a bit quicker than one due to market failures.

  4. It’s amusing how the media always has an explanation for any given day’s movement in stock prices. They must practice by looking for shapes in clouds

    1. Investors who lived through the 2008 financial crisis may have learned that apparently dire times are a good moment for long-term investors to accumulate shares at low prices that will eventually recover in value.

      Next time I’ll read the article before commenting. Or maybe I won’t.

      1. In response to my own comment, above.

        1. can’t read, can’t respond in correct space …

    2. Explanations of the economy are based on the latest polling data and favorability to whatever candidate replaces Joe Biden.

    3. Yup, and their explanations are often like they are looking at a Rorschach test.

      Also, I’ve seen a lot of articles taking about how the stock market has crashed that seem to be written by people who assume it has crashed without actually looking at the numbers.

    4. I laugh at their “educated guesses’,Reason is actually correct here;
      the market resiliency is actually just keeping pace with inflation.

  5. The New Yorker reports, “issued a warning to investors: being in the market at this point is much riskier than it appears.”

    Risk something something Reward?

  6. Paul Krugman, the New York Times columnist and Nobel-Prize-winning economist, writes of “the disconnect between stocks and economic reality.”

    I’d like to write of the “disconnect between Paul Krugman and reality” but I don’t want to crash the internet.

    1. If you’d like more on that subject than you can handle, may I suggest the writings of economist Bob Murphy?

    2. I was going to comment on that too. Why would anyone take Krugman seriously? He said that using up billions of dollars worth of potentially productive resources to prepare for an alien invasion is a good way to stimulate the economy.

      1. I know what you’re talking about. He loves to make that economic argument that they teach in schools. War is great for the economy and the unity of the nation state! Look what it did after WW2! Funny how little the mention the whole mass murder of millions of innocents side of the equation. That’s kind of the main point of war.

        1. It’s a stupid argument even without the human cost. War destroys productive resources. How can it possibly be better to use your time, energy and resources to produce something that will soon be destroyed (ammunition, tanks, ships, etc,), when you can use your time, energy and resources to produce something of lasting value (roads, bridges, houses, etc)? [I’m leaving aside that non-physical value was created by defeating the Axis powers because that’s not the crux of Krugman’s argument] One doesn’t need to be an economist to see that. It’s common sense. Did WWII take us out of the depression? I personally don’t think so, but it doesn’t matter. Because if it did take us out of the depression, we could have used all those same resources to produce something of lasting value and had the same economic effect.

          1. Indeed, it is often overlooked that all the economists were SURE that the US would crash hard post WWII as the country stopped its war time footing. Instead, it turned out that the US was well positioned to sell into Europe and Asia where most industrial infrastructure had been destroyed. So they forgot about their predictions of doom and it became this fuzzy “War saved us!!!”

            1. “War saved us!!!” … Yup-yup-yo!

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              In these here days of dangerous medical implements of destruction, stay ye SAFE from the flute police!

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              1. You are a pathetic piece of shit, and it’s likely even your dog is bored by your idiocy.

          2. Rebuilding destruction is profitable.

      2. This is the site that quotes Matt Yglesias, Vox, CNN, and NYT more often than they should.

    3. Krugman should be hiding his head in shame,he’s been wrong about almost everything.How can the NYT keep that fool around?

  7. >>the resilient stock market

    for the Elites is more cake and pie. for the peasantry is “hope you got in low”.

    1. Agreed.

  8. What the hell has the stock market got to do with the economy? Nobody’s betting on what the economy is going to do, they’re betting on what the Fed and the Treasury are going to do. And everybody knows what the Fed and the Treasury are going to do.

  9. “Low interest rates mean that investors seeking income have to seek out dividend paying stocks.” This is so wrong. And yet I hear it all the time. You can get income from a stock from either dividends or price appreciation. What’s important is the total return from both together. You can always sell shares in order to get the cash you want. You don’t have to rely on dividends. As an example, which stock would someone want to have owned since March 23 – the recent low of the S&P 500: American Airlines, which pays a dividend yield of around 4% and has seen its price go down by 4%, or Amazon, which pays no dividend and has seen its price go up by 58%? And there’s an advantage to getting your return from price appreciation: you can control when you generate taxable income, unlike with dividends. It might be that the tax rate on price appreciation (i.e. capital gains) and dividends can be different, but that can go either way depending upon the circumstances of the individual.

    1. I have long argued with my friends that if you wanted to try and create more stable incentives, gains from Dividends would be untaxed, and gains in capital appreciation would be taxed as income.

      Mind you, I would prefer no taxes. But if we must tax, and we want to favor investment, stock appreciation is not investment. When you buy a company’s stock you have not invested anything (unless you were part of the IPO). That is, you have not deployed your money for wealth generation. You are just buying an asset and hoping it goes up in value. Dividends, on the other hand, are the result of a company generating wealth (and btw already paying taxes).

      I think the focus on short term stock appreciation over long term stable growth would be more balanced if this route were taken. Again, I would prefer no taxes, and I am not a fan of using taxes as a social tool. But again, if we are going to pick winners and losers via taxes, that would be better IMHO.

      1. Makes sense. Thanks for the take.

  10. Although unemployment numbers are high, it may be that a lot of the unemployed are not “breadwinners”, but instead college students and others who tend to take jobs like waiter, bartender, clerk, Uber driver. People who can fall back on staying with their parents for a whole. As opposed to, say, the Great Depression, when the main earner for the family lost his job.

    1. A related point was made by a market analyst three weeks ago. He’s bullish on the market. The spending power of the people that have lost their jobs from lockdowns, on average, is way less than in prior recessions. He made that point before the statistic came out recently that the unemployment rate for those that have been making less than $40,000 a year is now 40%. So when the lockdowns substantially end the amount of spending power in the economy will be much higher than coming out of prior recessions. Another analyst also pointed out that with the level of layoffs we’ve seen, the amount of revenue that companies need to get back to previous levels of profitability is a lot less.

      1. Good info.

  11. Also, why shouldn’t there be a quick economic recovery? After all, the economy was functioning pretty well before it was artificially suppressed by making people stay at home.

    1. You ever run a business? A one week vacation shutdown normally took two more weeks to get back to the same efficiency level as before. Make it 10 weeks and it likely will take up to 20 weeks, depending of course on the business. And guess what? Some of your vendors are now out of business and you have to go to your second or third sources who just may be overwhelmed taking care of their customers who sourced them first. Oh, and a bunch of your receivables are from folks who can no longer pay you. So you have to start a round of financing with your bank with all the paperwork that entails.

      1. Yeah this idea that small business can just take a few months off and magically reappear is horseshit. Even if the owner has a rainy day fund to support the family (probably their retirement savings) they have fixed expenses that the business will continue to suck up. Rents, utilities, accounts payable, taxes, bank notes, accrued employee costs etc. are there every morning when they wake up whether or not any revenue comes through the door. If they have a business loan the bank also has a lien on their house. But if they wait until the governor is ready they might be able to reopen at 25% capacity which won’t pay the bills unless they triple their pricing. Most small businesses in lockdown states have no choice at this point except to cut their losses. They’ll have to vacate the premises and sell their equipment at pennies on the dollar or pay to have it hauled to the dump because who the fuck is going to buy it? The stock market doesn’t give a shit about any of this. There will be some big winners on the other side of this and there are short term gains to be had. And as long as the FED gives them free money there is no personal risk. Main street can dry up and blow away as far as they’re concerned.

        1. Well said.

    2. Also, why shouldn’t there be a quick economic recovery? After all, the economy was functioning pretty well before it was artificially suppressed by making people stay at home.

      Doctors wonder the same thing about reviving dead people.

    3. Demand at the margin is not getting back to ‘normal’ any time soon for the simple fact that way too many people are terrified.

      A marginal demand swing of +/- 2% can take you from booming economy to recession. If the fear-induced behavioral changes drop consumption by even 8-10%, everything changes.

  12. Paul Krugman


    Phew! Oh, man. For a second I thought this was a serious column.

    1. Give them a break, still hungover from their drink depression from Amash dropping out after 3 days.

  13. A lot of companies are using the downturn to restructure and cut unproductive or over paid staff that they normally could not without risking a lawsuit. There are the minority and or female employees that are not cutting it or are maxed out on pay and benefits, they can use this situation as cover. I can also see tech companies using this time to move out of high regulation high tax states and using corona/wuhan as a distraction. All of these and more are good for the corporate bottom line and intelligent investors know this.

    1. Racist, and a slaver, what a surprise.

    2. On the mark-stevo….

    3. You.

  14. Automatic rebalancing, seeking dividends and appreciation, experience from 2008, a devaluing dollar, optimism as the best case.

    All these explanations mask a single bedrock truth that’s the real best case:

    Owning a share of the world’s productive companies is better than owning a share of the world’s unproductive gold or real estate or of the world’s consumptive government securities.

    rConstitution Paper 10: Fractional-Reserve Banking Is Unconstitutional
    jamesanthony .us/papers

  15. What the market is telling us is two things.

    (1) Big companies with access to public markets will be survive a margin call and scoop up would-be competitors at huge discounts over the next 18 months.

    (2) When interest rates get close to zero, the number of years of profit that discount to present value at material levels increase. So losing months now of profits will be offset by larger amounts of future profits.

    This is not the economy writ large. But companies that are large, that avoid bankruptcy (most of them), will benefit in the long run and that is what the market is. MSFT, FB, Alphabet, etc, can just purchase the next Slack, Zoom, Linkedin, etc, for pennies on the dollar. In many cases, they can buy companies that would not otherwise sell because raising money is expensive, hard, and a lifetime of being really rich vs. wealthy seems like a good tradeoff for the founders to make – i.e., take the 100 million on the table and forgo the potential for 2 billion in 6 years.

    1. And of course the stock market is mostly relatively big companies. There’s no mom and pops trading on wall street. So the companies which are likely going to get hit the worst aren’t publicly traded. (And any big companies that take a really bad hit, like airlines, have enough political heft they get billion dollar bailouts).

  16. The actual reason comes down to some very simple details. Those that are capable of investing significantly in the stock market are still employed. Not only that, they are not being allowed to spend money on other things. So now you have a population of wealthy with even more money and no where but the stock market to spend it on. Duh!

  17. Uh, no. It’s not the wisdom of crowds inflating equity markets. It is the printing of currency.

  18. The stock market is just a big gambling game for most players,trying to outsmart each other…kinda like pari-mutual wagering at the track.The NYRA program says,the odds on a horse do not indicate
    the horse’s ability to win,but the public’s perception of who will win.

  19. The market is *ALWAYS* short-term wrong and long term right. As a result, market timers take it in the shorts, the same way Las Vegas gamblers do; brag about this week’s winnings and ignore the last year’s losses.
    The market will return to trend; timers will lose. Bet on it.

  20. Joe & Jane Sixpack sitting on thousands of dollars in their retirement accounts. Where else are they going to go with it, a CD? Lol. What I find very intriguing: almost all the Elliot Wave Chartists were predicting the S&P dropping into the high 2300s right around this time back in November/December with no knowledge of the pandemic, and those same people are predicting the S&P goes back up to 3400 by the end of 2021. The only question is ofa V-shape recovery or a W-shaped double dip on the way up.
    tldr: Markets behave in certain predictable ways because markets are made up of humans interacting with each other, and humans definitely behave in certain predictable ways.

  21. Omitting the most obvious. If the government pumps in trillions into the economy, prices soars. Not least asset prices. Creating new bubbles, completely disconnected from the real economy.

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