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In 2020, the Coronavirus pandemic escalated, leading to millions of people being infected, hundreds of thousands...

In 2020, the Coronavirus pandemic escalated, leading to millions of people being infected, hundreds of thousands of people dying, and changes in most people’s everyday lives. The economy “shutdown” with millions of North Americans losing their jobs, businesses shutting down on a temporary or permanent basis, and many consumers staying inside for several months. The stock market fell significantly, but by the end of Summer 2020, many indexes were reaching all-time highs as seen below: S&P 500 Index In other words, as Canada and US were experiencing some of the worst macroeconomic results in several decades (such as unemployment rate and GDP growth), the stock market was booming. Why is there such a seemingly “disconnect” between the stock market and the economy?

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Expert Solution

Stock markets are not always rational so they are often reflecting the futuristic expectation of various market participants. Stock market are never representative of the current scenario but there will always be trying to reflect the future expectations of various investors into the market.

Right now, there is a significant disconnect between the stock market and the real economy because stock markets participants are trying to discount that coronavirus crisis is not going to impact the overall economy in the manner it was predicted to, and it is also trying to discount that vaccine will be available in few months so it is trying to reflect the high optimism of various market participants and stock market has also been fuelled by the aggressive rate cuts by the Federal Reserve in the monetary policy close to the 0, so that stock market has got a significant boost in context of low interest rate and supportive Federal Reserve,so, it has also been assured that they will be providing various kinds of bailouts in order to revive various companies who are having liquidity crunch and credit crunch so stock market is running on high optimism and it is reflecting an irrational exuberance and significant optimism on recovery so there can be a significant disconnect between stock market and real economy which is currently visible in United States of America

jeff jeffy answered 1 year ago
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