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As the novel coronavirus went from localized epidemic to global pandemic, the world’s stock markets not surprisingly responded by falling, sharply. By March 23, both the S&P 500 and the S&P/TSX Composite Index had shed a third of their value, compared with the start of year.

But then something else happened: Equity markets started rising. Even after a down day Wednesday, stocks in Toronto and New York have regained about half their losses.

Back on March 23, the worst of the pandemic was yet to come. Canada had barely more than 2,000 cases of COVID-19, and just 24 deaths, compared with more than 71,000 cases and 5,200 deaths now. The progress of the virus in the United States has been similar, albeit worse.

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And with the lockdown barely two weeks old on March 23, the bad economic data was still to come. Yet as the data rolled in, markets went up. Take May 8, when both Canada and the U.S. released figures showing economies suddenly suffering from Great Depression levels of unemployment. The S&P/TSX Composite and the S&P 500 reacted by closing up, by 0.9 and 1.7 per cent, respectively.

The S&P/TSX Composite is only about 18-per-cent below where it started the year, even after Wednesday’s pullback, and the S&P 500 is just 13-per-cent below where it was.

What gives?

We won’t pretend to know what the “right” level of the stock market is, because there is, of course, no such thing. Prices are what they are. And what they are is what buyers and sellers believe they should be. Those beliefs can change, and abruptly, as they have twice this year.

There’s also the fact that, while Wall Street and Bay Street have a relationship with Main Street, it’s far from a one-to-one correlation between the state of consumers and small businesses, and the fate of equities. The stock market does not perfectly reflect or represent the underlying economy.

Take the S&P 500. Just five companies – Microsoft, Apple, Amazon, Facebook and the parent company of Google – account for a fifth of the value of the main U.S. index. By the nature of their businesses they are all, to some degree, insulated from the pandemic’s economic fallout, and may even benefit from it. Despite what’s happening on Main Street, shares in Amazon and Microsoft are trading above where they started the year, and the share price of the other three companies are roughly flat.

There’s also the fact that economic data is backward looking – a snapshot of what happened yesterday, and usually weeks ago. Investors valuing a company are interested in what’s going to happen tomorrow, or in a few years. The past is certain. The future’s a bet.

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Nevertheless, the real economy and the speculation of the stock market always have to reconcile. Not to get too philosophical here, but tomorrow eventually becomes today, as the future on which bets have been made moves ever closer to the present.

Both the tough unemployment news that landed last Friday and the relatively solid performance of stock markets over the last few weeks are a reflection of the pandemic situation – the former a statement about where things are, the latter a hope for where things soon could be. The fulfillment of those hopes comes down to the success of monetary and fiscal policies to fight the recession, and more so the success of public health measures aimed at ending the recession by suppressing the virus.

It’s why markets stumbled Wednesday after U.S. Federal Reserve Chair Jerome Powell spoke. He said the economic situation was “highly uncertain,” and worried about the possibility that this recession, which he described as the worst since the Second World War, could linger and leave scars lasting for years, in the form of permanently constricted incomes and lower levels of growth. To prevent that, he suggested that the U.S. government, which has already rolled out a large rescue package for business and people, consider even more fiscal stimulus.

In the long run, high-flying asset prices will either descend and converge with a depressed economic reality, or a sedated real economy will rebound, and live up to the stock market’s confidence. The head of the Fed called for action to promote the latter outcome, while reminding us that, absent success against the novel coronavirus, the former scenario is a large and growing risk.

Sign up for the Coronavirus Update newsletter to read the day’s essential coronavirus news, features and explainers written by Globe reporters and editors.

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