Happy Days Are Here Again (Never Underestimate The Stock Market)

A few months back, I made a post discussing the stock market’s failure to correctly anticipate the impact of COVID-19. More recently, there has been widespread puzzlement as to what’s causing the recent rally in stock prices.

Today, we have an answer to all of these questions. Real shocks simply are not as important as everyone has assumed. While I’ve generally argued that real shocks are overrated, even I am somewhat guilty in this case, as I had assumed that unemployment was likely to rise to 20% in May. Instead, it fell to 13.3% and the NASDAQ hit an all-time record. I was wrong.

Now, we know what the stock market has been sensing for weeks; this depression is not what we thought. Also, kudos to Lars Christensen. We still don’t know if his “less than 6% unemployment by election day” will be correct (I’m still skeptical), but it’s looking much more plausible than yesterday.

Tyler Cowen links to a story showing that this may be the first dental office led economic recovery in world history. Heck, why even use the term “may be?" This is the first dental office led recovery in world history. 

And why not? Half of the collapse in the first quarter was in health care, the one sector you’d think would do well in a pandemic. Personal income soared 13% in April, as unemployment rose 1000 basis points. Our economy is like Crazy Town in that old Betty Boop cartoon.

The entire recession lasted for two months. And, no, the recovery was not entirely due to the end of lockdowns, as the data was mostly collected in the second week of May, when many big states were still closed down. (We’ll know more when we get the state-by-state data. It’s gradually getting safer out there, and businesses are finding creative ways to shield customers from the virus.)

Again, never overestimate the impact of real shocks on the business cycle, and never underestimate the amazing prescience of the stock market.

PS. Some pundits gripe and moan that the stock market no longer reflects the situation of average Americans. They are right, it doesn’t. Personal income is up dramatically since February, whereas the S&P 500 is still down somewhat from February.

This also removes the last shred of doubt as to whether the slow recovery from 2008-09 was caused by tight money or real factors. It was tight money. Case closed.