Historically high unemployment, a steep economic downturn and a grim milestone reached in terms of COVID-19 deaths – the bad news keeps rolling in, and yet, the stock market has rallied through April and large parts of May, recovering much of the losses incurred in the early weeks of the pandemic. On Wednesday, Nasdaq, S&P 500 and Dow Jones, closed at 10,020, 3,190 and 26,990 points, respectively, up 43, 45 and 46 percent from their March troughs. While the latter two are still slightly in the red for the whole of 2020, the tech-heavy Nasdaq moved into positive territory in early May and climbed to a new all-time high this week.
So why did the stock market crash at the outset of the pandemic only to recover once the actual fallout becomes visible? While some argue that this is due to the fact that the stock market is actually a couple of months ahead and that the recent rally is based on the assumption of a quick recovery, others are seeing a disconnect between markets and reality that will eventually lead to another crash. “The gap between markets and economic data has never been larger,” Matt King, global head of credit strategy at Citigroup wrote in a recent note, adding that he considers a V-shaped return to normal as extremely unlikely.
As the following chart shows, all three major U.S. stock market indices bottomed out on March 23, when the number of confirmed COVID-19 cases in the U.S. stood at 43,000. Since then, the outbreak has taken a significant turn for the worse, infecting 2 million Americans and killing more than 112,000 as of June 10.