A reader wrote early this month asking me about “the paradox of the stock market’s stellar performance during our acute economic distress.”

By early this week, the stars were falling. Tech stocks dragged the Nasdaq into the 10%-down “correction” territory. Yet as I write, shares are bouncing back — even as the wider economy’s prospects for a rapid recovery look dim.

All of which reinforces some axioms:

• You can’t time the market.

• Market moves can rarely be attributed to one simple cause (the 9/11 attacks being the exception, not the rule). Millions of distinct decisions and actions drive stocks.

• Generally speaking, two emotions power the market: greed and fear.

• The stock market isn’t the economy (although it can affect the economy).

Nevertheless, the contradiction between the severe pullback in the economy because of the pandemic on the one hand, and the roaring stock market on the other, does seem remarkable. After all, the Great Depression was preceded by the market crash of 1929.

Yet Wall Street performed well during the 1918-19 Spanish flu, much deadlier than the current pandemic. The resilience back then can be attributed to the economy not being shut down, as is the case with COVID-19, and the relatively mild recession that was mostly a result of World War I production ceasing.


One of those instances when the moon was in the Seventh House and the stock market aligned with the economy (with apologies to the 5th Dimension) was earlier this year. Between Feb. 19 and March 20, the S&P 500 lost a stunning 32%, erasing three years of gains. (See “fear” above).

The early stages of the subsequent market rally can be attributed to the Federal Reserve pumping unprecedented stimulus into the financial system — and a promise of trillions in loans if needed. Companies locked in debt at historic low interest rates. This gave incentives for investors to snap up stocks at bargains and begin a buying frenzy. (See “greed” above).

“The fact that the Fed started injecting all this money into the (bond) market pushed prices up,” according to Wharton finance professor Itay Goldstein. The asset prices are “mechanically pushed up” by the central bank. Other asset prices rose “because investors are always looking for places to put their money.”

At the same time, the U.S. House, Senate and President Donald Trump came together to pass and sign a $2.2 trillion economic stimulus act in late March.

Yet the rally of the spring and most of summer has other peculiar roots — ones that help explain why the bulls kept running when earnings reports disappointed and it became apparent that a second federal stimulus might not make it.

One of the most fascinating is SoftBank. The Financial Times unmasked the Japanese conglomerate as the “Nasdaq whale” that had been buying billions of call options on U.S. tech stocks. Among the major companies whose shares were involved were Amazon and Microsoft. Those options depended on the shares rising.


The story said SoftBank was “fueling the largest ever trading volume in contracts linked to individual companies. … One banker described it as a ‘dangerous’ bet.”

Indeed, it turned out that way. By the middle of this past week, SoftBank had lost $12 billion in market value as those options went sideways because of the Nasdaq stumble.

Sure, many tech companies have benefited from the stay-home orders with workers who can work remotely using their products. But what happened with SoftBank was much more exotic and had little to offer average “mom and pop” investors.

Also, consider that the S&P 500, which was hitting records, would be considerably lower without “FAAMG.” That’s Facebook, Apple, Amazon, Microsoft and Google, which are its five heaviest-weighted components — in early September they accounted for 24% of the index’s value. These giants are hardly representative of the entire economy; on Wall Street their outsized performance may cloak the market’s true health.

In addition, market moves are further distorted by flash trading, where advanced technology is used to gain an advantage for high-frequency trades, especially for preferred clients. This is only one of many elements that have added to the complexity and risk embedded in today’s markets.

Meanwhile, this rally went on despite the federal government’s bungled response to COVID-19, leaving the United States with the worst pandemic effects among advanced nations; the most severe economic contraction since the Great Depression; major industries such as airlines, hotels and restaurants savaged; a presidential election against a backdrop of historic division as well as protests and civil unrest, and a halting recovery.


Yes, I’d call that a paradox.

Wall Street is only partly connected to the public good. When it’s not gambling with derivatives and pushing for short-term financial performance, it helps raise capital for companies.

But as of 2016, the most recent data available, only 14% of American families directly owned stocks. Some 52% of American families were invested in the market — but most through 401(k)s and similar retirement accounts. So the benefits of the COVID-19 rally haven’t been evenly distributed.

Some market observers warn that we’re seeing a “bear market rally,” a price rise that’s cloaking underlying weakness and storms ahead. And a pandemic depression, or long period of stagnation, might be ahead.

Emily Roland, co-chief investment strategist at John Hancock Investment Management, told Bloomberg in July, “It’s been a bull market that really has not been fully embraced. There’s a certain amount of skepticism inherent in investors today, and it makes sense.”

For example, plenty of investors are shorting stocks, betting they will go down in value. Also, the Chicago Board Options Exchange’s volatility index remains high. And the amount of cash sitting on the sidelines is at a near record.

The recent nosedive attested to those jitters. And the latest rebound isn’t a vote of confidence in the wider economy — or even a sign that we really can sustain this rally. Paradox, yes. But eventually the wider economy catches up to Wall Street.

This column has been updated to correct the size of the economic stimulus act in March. It was $2.2 trillion.