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With central banks all over the world acting in concert, reinforced by fiscal measures on a grand scale, we have been witness to a policy tsunami of unprecedented proportions. Yes, the great financial crisis was met with massive monetary and fiscal measures, but interest rates were higher then and fiscal balances less controversial.

Besides, when central banks and governments all over the world feel impelled to act more or less simultaneously, you know that they act on some kind of market failure. And when there's a market failure, you know that securities prices are generally too low – as in artificially low, or temporarily low.

No wonder this army of policy measures managed to calm and lift markets all over the world.

Isn't it surprising, though, that markets keep rising while real economies are taking a battering? High unemployment and high stock market pricing don't seem like the perfect match, which an inordinate number of commentators have already pointed out.

Let me then iterate the point that lower interest rates imply a more stoic view of the stock market. The lower your discount rate, the less importance you should attach to events in the immediate future. In other words, lower interest rates spur a more long-term view of stock market pricing.

That's not to say that daily movements are notably mollified. With a tug-of-war between such strong forces as coronavirus measures on one side and monetary and fiscal countermeasures on the other, it's no wonder that financial markets keep oscillating between hope and despair. Here's an interesting illustration of risk that you won't find in a textbook: If you sum all the down days in the MSCI World Index during the first half of the year, you will find an aggregate figure of -99.4%. A bit of short-term noise there, I'd venture.

Yes, in local currency the world index is still down 5 per cent for the year. Over the last 12 months, though, it is actually up 4 per cent. If you didn't know what had happened in the intervening days, you would quite possibly conclude that the market was yawningly calm.

Just don't be fooled into thinking the stock market says it all. With much lower interest rates, we have no way of observing the degree of investor anxiety. That, however, can be gleaned from the bond market. After tightening somewhat last fall, high-yield spreads have widened by almost 2.5 percentage points in the US and by some 1.6 percentage points in Europe. It seems countermeasures have been more successful in lifting stock prices than in lifting spirits.

However, if they do work as intended, it is quite likely that the bond market will get a nice lift as well.



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