NBC News: Stocks Soar Despite Coronavirus and a Recession. It's Time for a Reality Check, and a Crash

June 09, 2020

Article by Kevin Carmichael in NBC News

"My 10-year-old son asked me if he can open an E-Trade account so he could buy Tesla stock," Emily Roland, co-chief investment strategist at John Hancock Investment Management, told The Financial Times last month.

That a prepubescent child is asking to buy shares of Tesla, which have increased by about 340 percent in the last year, is a subtle indicator that something other than a careful study of economic fundamentals is driving stock prices. Instead, psychological factors appear to have taken over, making indexes like the Dow Jones and the S&P 500 poor gauges of the actual strength of the U.S. economy. We should wrench our eyeballs from the tickertape of Wall Street before it's too late.

Monday's case in point: Stocks are soaring even though the economy is now officially in recession.

The National Bureau of Economic Research, which dates business cycles, said Monday that the previous expansion peaked in February, just before COVID-19 emerged as a threat in North America. Much of the U.S. economy was effectively shut by March, at the cost of more than 20 million jobs and the highest unemployment rates on record.

Some of America's best-known investors, including Warren Buffett, have expressed reservations about the economy's prospects and traders' exuberance. But a wave of relatively unsophisticated investors has joined the frenzy with the help of unconventional middlemen like E-Trade, a low-fee online brokerage that makes buying stocks as easy as buying stuff on Amazon.

There's an argument that this burst of retail trading is a good thing, as a greater number of normal people are getting a shot at the same big returns that used to be gobbled up by the rich. But rich investors can rely on their bigger bank accounts to cushion the fall. And some kind of reversal seems possible, if not likely.

There are good explanations for why the markets rebounded with such force. The main one is the Federal Reserve, which is fighting this crisis with even more abandon than it showed during the Great Recession of 2008. The central bank is creating trillions of dollars to buy financial assets and extend loans to American businesses.

If the current market frenzy is the result of a certain narrative, then the rally could evaporate if enough investors decide the story no longer makes sense. That could happen at any moment as the stock market glow fades under closer examination.

What happens when investors realize that the story they have been telling themselves has some ...

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