Some investors were surprised by U.S. stock market gains in April and early May, during a period of dismal economic news. Although the U.S. unemployment rate surged to 14.7% in April, a month in which 20.5 million jobs were lost, the S&P 500® index rose 13%. The index continued to gain ground in the first half of May.

Why is the gap between market and economic performance so wide? There are several reasons.

First, one of the more powerful forces driving markets has been the massive injection of liquidity from both the Federal Reserve and Congress. The Fed’s balance sheet has grown exponentially, surpassing $6.7 trillion as of May 6, as the central bank bought securities in an effort to support prices and flood markets with cash. Meanwhile, Congress has reacted to the COVID-19 pandemic by doling out more than $2.5 trillion—in three separate phases—to taxpayers and businesses in the form of direct relief payments, loans and grants.

At the March lows, stocks were pricing in the kind of economic collapse we’re currently in the midst of. However, the subsequent rally was less about economic optimism, and more about Fed-provided liquidity. Although stimulus can create its own set of problems over time, so far markets have been willing to focus on the positives and ignore any potential negative payback for the stimulus.

Second, while there is no comparable history to the current crisis, historically it has been common during recessions to see stocks rebound in advance of the trough in economic activity. In fact, the best forward one-year stock market returns historically have come after the worst decile of U.S. nonfarm payroll reports.

The best returns have followed the worst jobs reports

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, 2/28/1939 to 4/30/2020. Past performance is no guarantee of future results.

It’s worth noting, too, that the stock market’s recent gains haven’t been broad-based. Investors have piled into sectors that are generally well-insulated from coronavirus-related pressure, which have also attracted momentum-seeking investors. You can see in the following chart that these sectors—Information Technology, Communication Services and Health Care—now constitute over half of the S&P 500’s market cap.

Three sectors now account for more than half of S&P 500 market cap


Source: Charles Schwab, Bloomberg, as of 5/14/2020.

A relatively small number of stocks have been responsible for driving the rally. Large-cap stocks have continued to outperform vs. small caps, and the Energy sector has been the decisive leader since the S&P 500’s recent low on March 23. Energy stocks’ performance alone suggests that the recovery has been speculative in nature—representing more of a “reversion trade,” rather than presumptive of an imminent rebound in economic growth.

We’re past the peak in global lockdowns

As of last week, one could get a haircut in Germany, go to a bar in Spain, or back to school in Italy. As social restrictions are lifted, global economic data may begin to improve.

An Oxford University index measuring containment efforts peaked across the 20 major countries that make up the Group of 20 (G20) in mid-April and has now started to ease. We expect further easing in the coming weeks as countries implement their announced plans to loosen restrictions, and as life slowly begins to return to normal.

COVID-19 containment measures peaked in mid-April

Note: Oxford University’s COVID-19 Government Stringency Index uses 17 criteria to measure the stringency of national government responses to COVID-19. This list includes workplace, school and public transportation closings, cancellations of public events, restrictions on gathering size, shelter-in-place and home restriction orders, restrictions on internal movement or international travel, and public information campaigns.
Source: Charles Schwab, Oxford University Blavatnik School of Government as of 5/7/2020.

There are significant differences in the severity of lockdown restrictions among the world’s governments. Countries with the most stringent restriction measures saw bigger negative impacts on their economies. For example, stricter measures coincided with sharper declines in composite purchasing manager indexes (PMIs).

The more stringent the lockdown, the bigger the economic hit


Source: Charles Schwab & Co, Oxford University, Bloomberg, as of 5/8/2020. China’s figure uses the drop in February versus January to reflect the differing timing of lockdowns.