WALL STREET'S WEIRD PANDEMIC — A bit of a strange thing happened when Covid-19 rocked the U.S. starting in early 2020. Well, more than one strange thing, but I'm thinking of this one: Stocks went on a crazy ride higher. Much of the economy shut down and we all cowered in our homes — hoarding cash and learning Zoom. But Wall Street soared. Sure, stocks took an initial dive in late February and early March of 2020, the scariest of Covid times. But they quickly found a bottom in mid-March and began a rally that pushed all three major indices (the Dow, Nasdaq and S&P 500) to record highs. Then, something like the reverse happened: With Covid waning, unemployment down to under 4 percent and consumers dumping cash back into the economy, stocks started to tank. And tank hard. Despite decent rallies the last couple of days, the S&P 500 remains down double digits for the year. Nasdaq, home to the big tech names that raced ahead during Covid, took the worst of it and is now off around 23 percent for the year. So what the heck happened? There are several reasons for why it looks like investors blew off the virus and are now panicking during the recovery. First off, as you've likely heard, the stock market is not the economy. It's basically a mechanism reflecting investor beliefs about future corporate profits, sometimes many years in the future. During the pandemic, investors determined the damage would not be terrible and longer term prospects looked good. "Markets don't move on the absolutes of 'good' or 'bad.' They move based on 'better' or 'worse,'" Richard Bernstein, founder of Richard Bernstein Advisors, emailed Nightly. "The economy tanked in the first half of 2020 and was 'bad' in an absolute sense, but quickly began to get 'better.' Today the economy is 'good' but the fears are it will get meaningfully 'worse.'" Bernstein said he thinks those fears are way overblown "because there is little evidence a recession is looming." Another huge reason for the seeming disconnect between Wall Street and the virus: Massive government spending and support from the Federal Reserve. Between the Trump and Biden administrations, the federal government pumped trillions of dollars into the economy through direct checks, generous jobless benefits, expanded tax credits and the like. And the Fed, which had been gently trying to nudge interest rates higher before the pandemic, immediately reversed course and kept rates at effectively zero. The central bank also kept gobbling up trillions of dollars in assets in the form of corporate and mortgage-backed bonds and other securities. This essentially amounted to printing money. Wall Street loved all of it. Stock market investors want low interest rates so that stocks remain more attractive investments with higher returns than bonds. And they adore the government pumping money directly into consumer wallets to drive spending that fuels two-thirds of the U.S. economy. But all of this – coupled with war and screwed-up supply chains – can create significant price inflation. And that's just what it's done. The latest numbers: Inflation stayed near 40-year highs in April at 8.3 percent. That's down, but just slightly, from March's 8.5 percent. Wall Street hates inflation, more than it hated the virus. It cuts into the value of future profits – which is why tech has had it the worst this year – and pushed the Fed back into rate hiking mode. Rate hikes "makes things like make-believe assets like crypto very unattractive — and stocks somewhat less attractive at lofty valuations," Brett Ryan, senior U.S. economist at Deutsche Bank emailed. Welcome to POLITICO Nightly. Programming Note: We'll be off this Monday for Memorial Day. We will be back in your inboxes on Tuesday, May 31. Reach out with news, tips and ideas at nightly@politico.com. Or contact tonight's author at bwhite@politico.com, or on Twitter at @morningmoneyben.
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