The recovery in stock markets from their mid-March lows continues unabated despite the plethora of weak economic data and the cautious approach of governments to lifting restrictions in re-opening their economies. In particular, social distancing requirements are likely to remain in place for quite some time, which will inhibit the pace of economic recovery.
The S&P index in recent days has amazingly returned to levels of late last year, following its big gains over the course of 2019.
It is up by over 35% since mid-March, while the Nikkei has risen by nearly one-third. The rebound in European shares has been less pronounced, though still impressive, with the Ftse Eurofirst 300 index up by 25%.
Stock markets are taking the view that while it may take economies some time to recover, the exceptionally expansionary stance to fiscal and monetary policy has laid the foundations for a strong rebound in activity in the next two years.
There are also hopes that a vaccine for the coronavirus will be developed within the next year, which will unleash economies from all restrictions.
The consumer is critical to any global recovery as household spending is the lynchpin of virtually all economies. One notable and unusual feature of this recession is that even though there has been a collapse in economic activity and employment, household savings are going through the roof.
Household incomes are being supported also by the targeted government income support measures around the world, including wage subsidy schemes.
The US savings rate shot up to a 40-year high in March and skyrocketed to 33% in April. The European Commission has forecast that the household savings rate in the eurozone could climb to a record 19% this year.
In Ireland, banking statistics for April showed household bank deposits rose by a record €3bn in the month. They increased by less than €400m per month on average in the previous three years.
Much of this sharp rise is due to forced or involuntary savings as restrictions on economic and social activities to control the spread of the virus have taken a heavy toll on consumer spending.
The timing and pace of the unwinding of this build-up in involuntary household savings is one of the key issues that will greatly impact the nature of the economic recovery.
With low-interest rates set to anchor yield curves at very low or even negative rates in the next number of years, investors are prepared to be patient. They know that a major economic rebound should come at some stage, even if it has to await the arrival of a vaccine.
It will be fuelled by many forces, including strong fiscal stimuli, loose monetary conditions, and the unwinding of forced savings and pent-up demand.
It will be important to limit the so-called scarring effects and to ensure this crisis does not morph into another financial slump or leave a permanently high level of unemployment or a long trail of failed businesses in its wake.
That is why policymakers are gearing up for more action even as economies begin to re-open.
Last week, the European Commission proposed a new €750bn Recovery Fund for the EU economy. The ECB on Thursday is expected to announce a substantial increase to its bond-buying programme. And more easing measures are in the pipeline in the UK, US and elsewhere. Policymakers are pulling out all the stops and markets are taking notice.