Why the Stock Market Just Doesn’t Care

Recall that from Feb. 19 through March 23, as the pandemic grew in intensity, the S&P 500 fell a shattering 34 percent. What turned stocks around was the Fed’s declarations that it would do whatever it took to stabilize financial markets.

The Fed has been following through, with a vast mixture of securities purchases and emergency loan programs that give it the potential to lend in excess of $4.5 trillion, according to an estimate by Oxford Economics. The federal government’s $2 trillion relief program and stimulus from governments and central banks in Europe and Asia have given the economy a boost, but from an extraordinarily low level.

The consensus forecast for the current quarter calls for a decline of more than 30 percent in gross domestic product, according to Bloomberg, followed by a gain of 15 percent in the third quarter. If that sequence is close to correct, the economy will be in miserable shape in the fall, but the recession will be over.

That outlook is helping traders put a positive spin on the economic data that is pouring in. The American economy gained 2.5 million jobs in May, the government reported on Friday morning, a big improvement over the 20.5 million lost in April. Why not emphasize the positive and bid stocks higher?

Well, for one thing, the facts are not all positive. At the moment, tens of millions of Americans are still out of work and the unemployment rate in May was 13.3 percent, higher than in any previous postwar recession, even if better than the 14.7 percent rate of April. Another reason for skepticism is that stock prices are already quite steep, based on standard metrics like price-to-earnings ratios.

That’s not terribly surprising, Mr. Paulsen said, because earnings typically fall sharply in a recession. Today’s prices — and higher ones in the weeks ahead — can be justified by the rock-bottom interest rates in place and by the prospect of increased corporate earnings in the future.

“If the economy really rebounds,” he said, “then stock prices are likely to go higher.”

But that is a big “if.”