Why is the market rallying when the economy is such a bad state?

Unemployment has reached 26 million in the US, that's 16% of the US working population. It was just 3.5% at the beginning of Feb. While the economy is on halt, the stock market rallied 2.6% today, and it is now only 15% down from its high.

What's going on? People are losing jobs, but the markets are recovering at such a fast pace!

I think there are a few reasons for that:

  • Fed has been stepping in and supporting the market along with the stimulus checks

  • Very few companies have seen their stock prices soar. S&P 500 is often referred to as “the market.” Still, the S&P 500 is essentially the 500 largest companies in the US, which, especially during this crisis, are not indicative of the economy as a whole. And the largest 25 companies make up nearly 40% of the S&P 500. Here is a list of those companies:
    Apple, Microsoft, Google, Facebook, Berkshire Hathaway, AT&T, Johnson & Johnson, Intel, Verizon, JP Morgan, Amazon, United Health, Pfizer, Bristol Myers, Merck, AbbVie, Bank of America, Proctor & Gamble, Cisco, Comcast, Visa, Home Depot, IBM, CVS, Amgen.

  • Employees are expenses; job cuts are often good for the bottom line (sad but true)

  • Plus, the job market was exceptionally good. A lot of companies beefed up and over hired

Also, economic data (like jobless claims) is backward-looking, and the stock market is forward-looking.
For instance, the stock market fell 35% when there were less than 100 COVID-19 positive cases in the US.

​Among the companies that I'm following, MSFT and FB released their earnings. I was pleasantly happy with MSFT's results. Their revenue for the quarter was $35 billion, with an operating profit of $13 billion. Most of the growth is coming from the intelligent cloud segment, which is growing at 29%. After the latest numbers, my model estimates MSFT's fair value to be around $200, even with modest growth and margins.