The Massive Disconnect Between the Market and the Economy

Credit: Lucas Jackson / Reuters -

It is often said that the market is not the economy, and that fact is on full display right now. If you live in America, you have only to walk out your door to see or at least sense the depth and breadth of the economic shutdown. Streets are empty and shops and other businesses are closed. And yet by Friday’s close, the S&P 500 had recovered around sixty percent of its losses on the drop that began late February.

The shutdown is not just in the U.S. either. If anything, it is far more complete and more invasive elsewhere.

My wife was on a Zoom (ZM) call yesterday with a group of our friends from our days in Tokyo who are currently, as usually happens within a group of expats, living all over the world. Other than concern for one of the group who had just been released from hospital after fourteen days on a ventilator in an induced coma as she battled Covid-19, the main topic of conversation was the extent of the restrictions in different countries.

The two most notable came from China and France. In Beijing, which is gradually getting back to work, regular checks of your health status and possession of a “certificate of good health” ID card are required if you want to move around. The person living in France informed us that they were allowed out of their home for only one hour per day and had to have proof of a reason for leaving, shopping for essentials or a medical appointment for example.

Can you imagine Americans acquiescing to either of those things? This is a country built on individual liberty and freedom. That is a great thing, but it makes an enforced restriction of that freedom hard, no matter how much it may help in some situations. The majority of people will probably buy in should that be deemed necessary, but it only takes a few holdouts to continue the spread of the virus and there are already protests against the relatively mild measures being taken here.

Giving up freedom will be seen by many as just too high a price to pay no matter what the threat, and yet the evidence from countries where this took hold earlier than here suggests that without such extreme measures, the Covid-19 pandemic will last a long time. Given that, how are markets performing as if this whole thing will blow over so quickly?

Even in crude oil, where twenty-year lows in the May contract futures are more reflective of the current situation, there is a disconnect. WTI for June delivery is also lower but is currently indicating a roughly 100% bounce from current levels in a month. There is a supply element to that as many firms will be making massive cuts to production over the next couple of weeks, but after a long period of massive oversupply, excess inventory can’t be depleted without demand increasing significantly. I, for one, don’t see that happening in a month.

I understand the psychology of traders here. They are paid to look forward and history leaves little doubt that this too shall pass. The problem is that that time looks further off now than it did a few weeks ago, and yet the markets are surging.

Something has to give.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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