Stocks are far outperforming the economy for now, but the future may hinge on whether there is another wave of COVID-19 infections as economies reopen, said Hussein Sayed, chief market strategist with FXTM. “The 31% rally in the S&P 500 since hitting a bottom of 2,191 on March 23 has been truly incredible,” the strategist said. “Economic factors should be the key determining factor for equity markets, but there seems to be an enormous disconnect between the performance of stocks and the economy.” Economic data are likely to remain dire, with U.S. jobless claims already falling more than 20 million since the start of lockdowns. The bounce in stocks is due to massive monetary accommodation and fiscal-stimulus efforts, Sayed said. The key, the strategist continued, will be the trajectory of the COVID-19 virus and how fast economies reopen. Some European governments are taking cautious steps toward reopening economies. “We will learn a great deal from these governments and countries of how life will look like in the near future,” Sayed continued. “But what if the virus infection rate begins to accelerate again and another lockdown is imposed? That is going to be a disastrous outcome, and instead of confronting a steep recession, we might end up with a long-lasting depression. Without a vaccine and proper treatment, life will not return to normal and spending behavior will continue to adjust to this new reality. Equity performance cannot diverge for a prolonged period of time from fundamentals, so if we do not see a true economic recovery in the coming months, expect another leg lower in stock markets.”
