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Despite ongoing economic headwinds globally from the Covid-19 pandemic, investors continued to view the future with rose-coloured glasses amidst their collective belief that the global economy will recover and, even if this takes longer than expected, central banks will continue to shower financial markets with their own massive buying of securities as well as an endless period of zero interest rates. That has been enough to fuel a stock boom larger than almost anybody would have believed back during the pandemic March lows six months ago. Since the S&P500’s nadir on March 23rd, the 50%-plus rebound marks the best 150-day gain for the big-cap benchmark on record. This has occurred despite over twenty million job losses in the U.S. alone and massive shutdowns of businesses globally. The disconnect between the stock market and underlying fundamentals seems unequivocally the greatest most of us have seen in our lifetimes. Following the shock of a mandated economic contraction, hazards melted away in ways both powerful and enduring. The huge fast fiscal-spending push and limitless central-bank money provision not only short-circuited the recession and placed a higher floor on stocks and corporate credit, it provided a real-world experiment in government authorities’ vast spending powers. In some ways the recovery is not totally illogical despite the severity of the pandemic. When we look closely at the economic numbers in the U.S., we see that the economy lost about 12% of its economic output from its peak, or about US$2.5 trillion. At the same time, the stimulus of the U.S. Federal Reserve and the additional congressional spending more than offset that decline with about US$4 trillion of stimulus. What we really saw was governments and central banks quickly ‘spending their way out’ of the downturn. This was not limited to the U.S. alone as Canada and most other industrialized countries went through similar exercises. The debt that has piled up in this rescue operation is just something that will apparently have to wait for another time to be dealt with. The chart below shows the rapid expansion in the Federal Reserve balance sheet to over US$7 trillion. Note that it was below US$1 trillion before the Financial Crisis in 2008.
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