What's up, stocks?

The bad economic news keeps pouring in from around the globe.  More than 16 million jobless claims in the US in the past three weeks....Germany set for recession....Canadian unemployment up more than a million in March....UK retailers falling like flies...heavy crudes selling for as little as $3/bbl....the list goes on.  Nouriel "Dr Doom" Roubini, never one to let a disaster go to waste, is dismissing all the conjecture about whether we will see a U-shaped, V-shaped or L-shaped recovery from all this, has flatly declared that the only shape he sees is an I, heading straight down.

And yet, after a precipitous decline that far outpaced the Great Crash of 1929, equity markets have not only stabilized but begun to show tentative signs of recovery.  After acknowledging that the markets' ability to foretell the future can never be trusted, what can we make of this?  It can't be hope that the virus will soon disappear, even though there are signs in many countries that the longed-for "curve flattening" is happening. At best this crisis still has months to run, especially in countries such as the United States that got off to a slow start in combatting it.

What seems to be driving the market action is a sense of relief that governments are taking unprecedented and aggressive steps to limit the impact of the pandemic on their economies. Some economists and commentators are referring to this as "stimulus", but that's not quite right, because nobody can seriously expect to generate any economic growth while  the virus rages on. What we are seeing is, rather, efforts to create a state of suspended animation, closing off large parts of the economy to prevent the spread of the virus, while protecting as many people as possible from economic hardship.

The more effective this suspended animation phase is, the shorter it will have to be, and markets collectively seem to be making the judgment, at least for now, that it will be short enough not to cause permanent economic damage. One key risk here, of course, is that governments rush to end the lockdown before the virus is truly under control; probably no need to spell out here which government is most likely to get that wrong. Another risk, highlighted by Forbes Magazine, is that companies will revise their earnings guidance down so aggressively that investors will take fright, resulting in another sharp selloff -- though it seems unlikely that the all-knowing Mr Market is unaware of that risk, which should therefore be priced in already. 

Everyone is looking for reasons to be cheerful right now, and after the panic seen a few weeks ago, equity markets seem, against all odds, to be offering just a little glimmer of hope.