Why has the US stock market rallied since the end of March? An academic’s view
There are three possible reasons argues Itay Goldstein:
- The stock markets are factoring in expectations that the U.S. economy will rebound 20% or more in the current third quarter, with the lifting of lockdowns and resumption of modest economic activity in many parts of the country;
- The Fed’s injection of all this money into the market pushed prices up. In addition to traditional quantitative easing of buying treasuries and mortgage-backed securities, the Fed has bought other assets like corporate bonds;
- The stocks that are doing very well – Google, Facebook, Amazon, Microsoft, Netflix – haven’t been hurt that much by the current economic conditions. Some of them maybe have benefited from them. But while they are very dominant in the stock market, their contribution to the overall economy is not as big.
Why Is the Stock Market So Strong When the Economy Is Weak?
By: Itay Goldstein – Wharton
The practitioners’ view
At the onset of the pandemic investors’ expectations reflected a much darker scenario than the one that materialized. This discrepancy could have driven the recent buoyancy of the stock market. In particular:
- Systemic stability risks were overstated – as monetary policy has contained stress in the financial system and unprecedented fiscal policy has shored up real economy balance sheets;
- A false dichotomy was predicted between emerging and developed economies – expectations about a clean correlation between economic heft and crisis outcomes, including health outcomes, have not been realized;
- Recovery “shapes” were more widely dispersed – V shapes have emerged at both national level (notably China) and also within the U.S., where, for example, retail sales and housing (new home sales) have bounced back and exceeded pre-crisis levels;
- Expectations of a break in the economic structural regime have not yet materialized.
Taking Stock of the Covid-19 Recession
By: Harvard Business Review – Boston Consulting Group
What are the stock markets implying about investors’ growth expectations
Focusing only on fundamentals is typically not the right way to interpret movements in the stock market. Past literature has shown that most of the variation in the value of the stock market is due to changes in expected returns, and not revisions in expected future growth rates.
In order to evaluate investors’ growth expectations, Gormsen and Koijen look at data from dividend futures i.e. contracts that only pay the dividends of the aggregate stock market in a given year. There are two reasons for using data on dividend futures: a) prices of dividend strips provide good forecasts of dividend growth and economic growth more broadly and; b) particularly relevant during this period, dividend strips are differentiated by maturity, just like nominal, real, and corporate bonds.
They then develop a simple asset pricing model of pandemics that allows them to understand the joint dynamics of short-term dividend prices, the aggregate stock market, and bond prices during the crisis. They find that, as of June 8, and despite the stock market rallies in both the US and the EU investors expect GDP growth over the next year to decline by 2.0% in the US and 3.1% in the EU.
Coronavirus: Impact on Stock Prices and Growth Expectations
Authors: Niels J. Gormsen, Ralph S. J. Koijen
From: University of Chicago
