Why Stocks Are Bouncing Back During an Economic Crisis

The US stock markets were shut the day after a multi-week plunge of nearly 30% last March 23. This decrease corresponded with a series of lockdowns in the country and similar moves throughout Latin America, South Asia, and Europe. Ever since it happened, the US economy has been in free-fall, with an increasing number of retail stores getting bankrupt, an estimated 26 million people filing for unemployment, energy and oil companies staggering on edge, travel grounded, and the GDP dropping to 4.8% in the first quarter. In short, this quarter is likely to be much worse. In late March, stocks are up across all indices more than 30% from that drop point.

The question that has been ringing all around is that how come stocks are soaring when the economy is crashing. How the market moves is often confusing, but in this situation, it may be because of the action by the Federal Reserve, financial markets are afloat in wide, water-hose supplies of money. The Fed has promised to lend or purchase trillions of dollars of financial assets since March, which is estimated to end up surpassing $8 trillion dollars by the time it is said and done. No one really knows to what extent the figures will rise. In comparison, the Fed ended up adding an estimated $3 trillion in 2008-2009.

And aside from the Fed, Congress has also allotted near $3 trillion in economic aid. The Bank of Japan also is the same for the world’s third-largest economy. Plus, the European Central Bank is following suit, and multiple governments across the world are not far behind.

As a result, even as real-world economies fall or freeze in the short term, financial markets stay afloat by a wave of liquidity.

That eventually burdens several investors, who see either sharp spikes of inflation or terrible reckoning ahead for stocks and bonds. Jeffery Gundlach, one of the most influential bond managers, warned this week that markets would soon quickly head south, and everyone should be more vigilant of panaceas. Analysts at Bank America conclude that the recent market strength is a dead-cat bounce, which is the same as what happened in 2008 prior to an intense crash later that year. Some believe that even with all the liquidity in the world, it still cannot compensate for the downfall of real-world economic activity. Also, these actions made by the Fed and governments are equal to flooding a drought area with water for just a few days. In short, it comes off like a temporary relief, but it does little good if there is no follow-up rain in the next months.

But there is another thing occurring that ought to give pause to the idea that market strength may be a head fake. If it were solely about a sea of money floating everything, then you would suppose stocks across the board would rise. But unfortunately, that is not the case.

There is a dramatic difference in how each company is faring that mirrors an unfriendly examination of how they will do in a world under crisis. Businesses that are portrayed as weak, such as retail stores in malls, are seeing stock decreases of 50% and have only recovered marginally since March 23. Michael Kors, Macy’s, and GAP all face discouraging forecasts, and no amount of liquidity in financial markets will cover that over. In some cases, energy companies that have declining demand for oil and high debt loads are on the brink of bankruptcy, and even the survivors have seen its stock cut half since March. The same situation has been occurring for the airline and hotel industries.

On the other hand, the advantages of the current disaster are doing well. Five tech giants – Amazon, Apple, Microsoft, Facebook, and Google – alone comprise $5 trillion of the market cap, and since mid-March, Amazon has seen its stock rise more than 30%. Costco and Clorox have also been booming along with Walmart and the video conference company Zoom.

So while markets are immobile on real-time economic components, they are going on reasonable judgments of fundamentals moving in and identifying between industries that appear to be the hardest hits from those that might even gain from the severe economic disorders that are caused by COVID-19. If everything were increasing extensively, that would mean markets were entirely removed. But they are not.

And for those who might see all of this as proof that the economy will be saved at the expense of millions of real people and small companies which will be sacrificed, unfortunately, it is different this time. For instance, the Fed promises to buy billions of dollars of municipal bonds at fair rates, which will result in the financial capability of cash-strapped state governments to retain teachers and police officers and programs even if Congress neglects it. That will mean that the public servants’ pensions will stay intact. The Fed also is about to grant another $500 billion to Main Street businesses, which might come a bit late to avoid last month’s trouble. However, it will still play a significant part in the ability of firms to move forward and eventually reemploy. The most apparent effect of the money in motion now is the stock market. But that will not be the only recipient as more money proceeds to Main Street and states.

So while it seems unbelievable that markets are doing well as the world economy spirals down, there is a way to the madness that results in some potentially advantageous effects of an otherwise desperate time. That may be a temporary relief for now, but it is also a reminder that the current crisis could be considerably worse.

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