Here’s How to Square a Rising Stock Market With the Dire Economy

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Here's how investors can have a positive economic outlook in the face of a pandemic that has shut down so much of the economy. jbarro writes

Selling like hotcakes. Photo: Eugene Garcia/EPA-EFE/Shutterstok In his newsletter, Bloomberg’s Joe Weisenthal notes that this recession is weird in certain ways. It’s not just the surprisingly buoyant stock market, with the S&P 500 recovering more than half its losses from the trough in March and the Nasdaq Composite actually up for the year. He points out, for example, that the Chainsmokers are raising a venture-capital fund.

But a recession can also be caused by a supply shock, in which goods or services become much more expensive or less available. The classic example is the oil crisis of the 1970s. Normally, you would expect prices to go up due to a supply shock and down due to a demand shock, and since the Consumer Price Index fell sharply in April, you might assume this recession is primarily driven by a demand shock.

Of course, there are reasons to think there would be a demand shock right now. Tens of millions of people have been put out of work. Even people who are working have good reasons to worry about their future income — whether they might lose their jobs in the future or whether their businesses might fail. So you would expect people to be less inclined to spend, reducing aggregate demand. On the other hand, the government has reacted forcefully to offset the demand shock with deficit spending.

 

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