Are Stocks Out of Control? What We Learned in May

(Bloomberg Opinion) -- The stock market is not the economy. Perhaps that's never been as clear as during the 2020 coronavirus pandemic. Even as nations stare down the inevitability of long, deep recessions and unprecedented levels of unemployment, U.S. stocks as measured by the S&P 500 Index have rallied for two straight months after plunging in February and March.

There are a few reasons for optimism. First, there was the quick response by the government to pump trillions of dollars into the economy and financial system. And with the rate of new infections slowing, people are emerging from lockdowns into new socially-distanced economies. But the outlook is far from sunny. Covid-19 continues to kill thousands of people globally every day, there is no vaccine, and mandatory social-distancing rules (and fear) are contributing to what is forecast to be the worst recession since the Great Depression and squash corporate earnings for the foreseeable future. And that's without accounting for a renewed worsening of U.S.-China tensions.

Are stocks completely out of control? Bloomberg Opinion columnists have been pondering that very question:

Jamie Dimon Captures the Stock Market Moment: “This is a recovery based so far on asset-price inflation rather than any economic data. Central bank and government action may have restored financial valuations but real incomes will still suffer dramatically for a long while to come … The stock market is looking even further into the distance than usual to justify its valuations, which is sometimes hard to square away against a constant stream of dire economic statistics and evaporating company earnings.” — Marcus Ashworth
For Markets, It's the Economy's Direction That Matters: “It's important to recognize that the magnitude of the weakness in the data is not driven by what we would think of as typical business cycle dynamics where a negative shock expands over time throughout the economy. Instead, we literally flipped a switch and told companies to close. You can't feign surprise at layoffs in the leisure and hospitality sector when restaurants and entertainment venues are all shuttered overnight.” — Tim Duy
Options Market Signals a Dire Picture for Stocks: “The market prices of options play a vital role in informing market participants of what risks lie ahead, and given market efficiency, they often tell a reliable story. When viewed through the lens of options prices, the current equities rally appears tenuous.” — Alankar and Scholes
What's Keeping Stocks Afloat? The ‘Microsoft Market': “No company has defied the pessimism more than Microsoft Corp., and for a lot of sensible reasons. The Seattle-based maker of global business and consumer software led all publicly traded companies most of the year with a $1.4 trillion market valuation.” — Matthew A. Winkler