Josh Barro tries to explain why the stock market has been doing so well in the middle of a global pandemic:
First, stock prices are supposed to reflect market expectations of the future profits of corporations….There has been news in recent weeks that gives us good reason to believe companies will be less profitable this year than we would have thought a few weeks ago. But there has also been news about medical research developments that provides reason to believe companies will be more profitable in future years than we might have expected a few weeks ago.
….Second, the most commonly discussed measures of stock prices, like the Dow Jones Industrial Average and the S&P 500, focus on very large companies. Large companies have more financial resources at their disposal than small ones do, and may be better positioned to weather a bad 12 months as they wait for vaccine hopes to come to fruition.
….Third, interest rates have continued to fall, and low interest rates boost the prices of many kinds of assets, including stocks.
That’s all reasonable enough, but I think my answer might be different. Instead of using a thousand words to explain it, though, here’s a single picture:
The red line is the trendline of the S&P 500 from 2015 through February of 2020. As you can see, the S&P 500 today is exactly on that trendline.
In other words, the stock market hasn’t soared recently, it’s merely made up its panic losses and gotten back on its old trend. Investors have apparently decided that 2021 will be about the same as they had always expected before COVID-19 struck. If you look at stock indexes around the world, you’ll see a pretty similar pattern everywhere.
So I wouldn’t say that investors are especially exuberent or anything. They’ve just decided that the early panic over COVID-19 probably wasn’t justified. I hope they’re right.
