Why has the stockmarket recovery been so strong when the worst of the economic damage lies ahead?
Is it false hope?
The surge which has seen Wall Street and the local NZX regain about half the ground lost in the March pandemic plunge has divided investors into bulls and bears, says Pie Funds chief executive Mike Taylor.
But ultimately a lot of the strength is tied to fiscal and monetary policy stimulus, Taylor says.
That might also determine how things hold up from here.
Around the world, the average fall for equity markets had been about 35 per cent across four weeks in March, Taylor said.
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On Wall Street and locally a least, where the comeback had been strongest, markets had recovered most of that ground.
The S&P500 has rallied 27 per cent is now down just 12 per cent in the year to date and about 3 per cent in past 12 months.
The NZX-50 is only off about 9 per cent in the year to date.
That wasn't necessarily so surprising when you looked at the completely unprecedented level of stimulus that had been unleashed by central banks and governments, Taylor said.
The US, for example, had unleashed the equivalent of 50 per cent of its GDP in funding already allocated or pledged.
If you looked at it very simplistically, US equities had lost about US$12 trillion in the crash and had rallied back by roughly the amount of stimulus that had been provided.
"You could argue, in some ways that the market has very efficiently priced the amount of stimulus from central banks and governments."
There's no doubt that there was still a lot of pain to flow through the economy, he said.
You really had to decide whether you were in the bull camp or the bear camp at this point, he said.
"The bulls will say that April was the low point in terms of contraction, with economies in lockdown and anything better than April is an improvement," he said.
The bulls would also have faith in the Federal Reserve to do whatever it takes to keep markets up.
"So that if the market falls they'll just keep printing more money," Taylor said.
On the other hand, the bear case recognised that there had been significant structural damage to the economy.
"For certain industries like airlines and tourism we've got no idea when they are going to come back," he said. "You can't keep propping them up forever."
So as businesses failed, unemployment would rise and there was a risk that economies had shrunk permanently.
"So have we seen earnings downgraded enough?"
Both cases had merits and it was hard to argue definitively either way right now, Taylor said.
Tech stocks definitely seem to be strongest right now as the world made a rapid technological leap based on pandemic isolation.
The FANG stocks (Facebook, Amazon, Netflix and Google) had been among the strongest on Wall Street.
The tech heavy Nasdaq index is actually still up 9 per cent on the same time a year ago.
"Often we see significant events like wars accelerate technological change. This is one such occasion."
Taylor noted that Warren Buffett had been unusually downbeat about the market outlook at his recent AGM (held by video conference).
That was perhaps because he had traditionally been a fan of old-world companies and steered clear of tech stocks.
Buffet also warned investors not focus too closely on daily market moves and try and focus on the earnings and underlying value of investments.
That was always good advice, Taylor said.
Although for active investors, it was worth monitoring through the volatility because "you might see opportunities that, if you only looked once a month, you'd completely miss", he said.