How can the U.S. stock market perform so well when the American economy is doing so badly? Though the S&P 500 declined by 30.43% from January 1, 2020, to the recent low on March 23, it is up 31.25% from March 23 to May 8. Between the crash and subsequent rally, the S&P 500 is down just 8.68% year-to-date through May 8.However, while the U.S. stock market has rallied, the country has added over 1.1 million confirmed positive COVID cases, processed more than 30 million new unemployment claims, closed half of America’s oil rigs, and slashed our steel production by one third.2 Why, then, should the stock market rally while the economy tanks?

Buying the Future

While most economic data is backward-looking and quantifies an outcome we had expected and/or experienced, investors buy stocks to participate in the future earnings of a company. To that end, a stock’s value is based on earnings that are anticipated but have yet to occur—and are by no means certain.

Given the recent rally, we can conclude that some investors might be anticipating a quick, v-shaped recovery, with economic activity normalizing in the next 3-6 months and corporate earnings returning to close to pre-crisis levels. Others may be anticipating a more drawn out recovery with more of a twelve to eighteen-month time horizon. Either way, at least some market participants are counting on earnings to rebound.

Extremely low-interest rates, accommodative actions by the U.S. Federal Reserve to support credit markets, and government stimulus measures to aid consumers and businesses, all likely elevate what investors are willing to pay for future earnings from U.S. firms.

Winners and Losers by Sector

Investors are not just buying anything and everything; they are being selective about which sectors they think will move through this crisis well. From January 1 through May 8, 2020, Information Technology has gained 3.88%, while Healthcare, Consumer Discretionary, and Communication Services each are down less than 4%. Given the pandemic, that resilience represents an astonishing vote of confidence in the American consumer and a reflection that investors believe winners will emerge from this crisis even stronger.

Even within Consumer Discretionary, year-to-date returns for automobiles and leisure products are -37.9% and -32.9%, respectively, while internet and catalog retail are up 21.7%, reflecting consumers’ accelerating migration to online purchases due to the pandemic.

Largest Firms Leading the Market

The S&P 500’s five largest constituents—Microsoft, Apple, Facebook, Amazon and Google—have performed remarkably well during this period. In aggregate, these five stocks have returned nearly +12.3% year-to-date through May 8, while the S&P 500 excluding these five companies has declined by about the same amount during the same time.

Effectively, investors are indicating that the business models of these companies are well-suited for a pandemic-related environment in which global citizens have moved even more firmly toward adopting technology for business, communication, entertainment, and commerce. The market capitalization of these companies had grown due to years of strong growth and high profitability even before the start of the pandemic; COVID, however, has created an opportunity to increase market share, eliminate rivals (particularly in retail), and grow customer relationships.

In some sectors, industries, and market niches, this downturn may enable the largest companies to get even bigger. As of December 31, 2019, the top five largest constituents of the S&P 500 index represented 15.4% of the index. By April 30, 2020, the top five largest constituents carried a 20.4% weight. As a result, five companies in a 500-company index represent one-fifth of the index’s return and other metrics. Amazon—an early pandemic “victor”—has grown from a 2.9% weight in the S&P 500 to 4.3% as its share price has increased by 25% since January 1.

Relative Value

One key driver of the performance of the U.S. stock market may simply be that investors have to put money somewhere. Low to negative interest rates around the world have made bonds an “expensive” and “risky” investment for investors who need to outpace inflation. If an investor needs growth above inflation, then the ample risks inherent today in commercial and residential real estate, private equity, and private credit can feel daunting, especially because such investments generally do not provide near-term liquidity.

So, at least some of the U.S. stock market gain may derive from investors’ need to put money to work where it can outpace inflation over time and where they know they can get it back (or at least most of it back) if and when they need it. For all the fancy reasons analysts develop for why the stock market moves, we should not discount the simple driver of needing to store value somewhere.

Implications

Over the long-haul, markets and economies tend to be closely correlated. But 8-10 weeks of a pandemic is no long haul. We expect to see continued dispersion between the economy and the markets here in the U.S. and around the world.

We also expect such dispersion to continue to drive divides between those who rely on investments for wealth and those reliant on salaries and wages. The former fared far better for years coming out of the Great Financial Crisis and appear to be faring better so far in this Great Lockdown. It will be essential for policy-makers, business, and civil society to work together to soften the blows of this crisis for those whose livelihoods depend on a healthy and vibrant economy. We should never let a robust stock market limit our ability to see, hear, or care about the suffering being experienced by those who live and work outside that rarified system.


  1. Performance of the S&P 500 and its sectors and constituents: Morningstar
  2. COVID count: Johns Hopkins; unemployment: Department of Labor; oil rigs: Baker Hughes; steel production: American Iron & Steel Institute