Stocks jump but pandemic may depress GDP “for more than 3 years”

Markets rose on Tuesday.

The S&P 500 surged 3.1 percent, the STOXX Europe 600 rose 0.6 percent and the Nikkei 225 jumped 3.1 percent.

Investors were encouraged by signs that some countries were relaxing restrictions on activity. For example, Spain has allowed businesses like construction and manufacturing to resume while Austria is reopening small shops. In the US, ten states are coordinating plans to reopen businesses.

Oil prices fell though. West Texas Intermediate crude plunged 10.3 percent and Brent fell 6.7 percent.

Robbie Fraser, senior commodity analyst at Schneider Electric, said that “the math remains firmly in favor of the bears”, pointing out that “global demand is suffering 20-30% losses, virtually guaranteeing a flood of crude and products heading into storage in the short and medium-term”.

Indeed, some analysts are warning that the stock market rally is predicated on the wrong assumptions.

“Most of the analysts are asking — ‘When will the economies return back to work?’ — which we believe is the wrong question,” said Boris Schlossberg, managing director of BK Asset Management, in a Tuesday note. “The much more relevant question is — ‘When will aggregate demand recover to pre-virus levels?’ That is a much more difficult dilemma to assess given the massive damage done to consumer balance sheets.”

Carl Weinberg, chief economist at High Frequency Economics, suggested in a note on Monday that even after the economy starts to recover, “the level of GDP will still be lower than where it started for more than three years”.