Whilst stock markets seem to be rising along with the growing optimism for an end to the lockdown, which is somewhat logical, they also seem to be completely ignoring the historically bad economic data, which is illogical. The story is that investors are so optimistic that they are looking past the economic downturn and focusing on the rebound that will come once everyone is let out and things start to return to normal. By this logic, it is a wonder that we ever have stock market crashes at all. Why would investors need to worry if things will simply revert to how they were after a short period of turmoil?

There are many answers to this question. Unemployment and consumer spending have experienced a massive shock and, whilst many workers have been furloughed rather than fired, the overall result of the crisis will lead to significantly higher unemployment than before the event and it will take time to improve. We will also find that businesses which were heavily leveraged before this event will come through it with even more fragile balance sheets and higher borrowing costs, if they come through it all.

Despite wide-ranging government guarantees, many businesses will not survive the shock of several weeks without any income. The number of individuals and households defaulting on debt is also likely to rise substantially. Unless the government intends to bail out literally everyone, the already-weak economic situation will become a lot weaker, not to mention that all this government largesse has to be paid for by someone.

Finally, stocks are currently more expensive than they have ever been in history and if they continue to defy gravity they are going to get more expensive before they get cheaper. With earnings set to plunge, there could be a limit to how comfortable investors are about paying record prices for deteriorating assets. The big rally in stocks since the March lows has surprised plenty of people, especially investment analysts who have changed their forecasts to match the change in prices whilst largely ignoring the change in valuations.

However, very few analysts or economists expect a v-shaped recovery in economic conditions, which suggests economic pain for longer. This view is backed up by the OECD, IMF, WTO etc with their dire forecasts for global recession. Investors need to decide if stocks really can run back up to record highs, even as the world sails through the toughest economic patch in history, or if perhaps the real bear market hasn’t even begun yet.

Richard McCreery is an investment adviser with over 20 years experience, based in the South of France. www.rmwm.jimdo.comRegulated in France by the Association Nationale des Conseils Financiers (ANACOFI), registration N° E004136. ORIAS member 13000050