A perky stockmarket v a glum economy

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FINANCIAL MARKETS look forward. Yesterday’s news is stale. What matters is the future, in particular the returns that today’s buyer of securities can expect. So there is some reason to think the S&P 500 share index might trace the near future of America’s economy.

Share prices in America have followed a dramatic V-shape recently. A brutal sell off has given way to a lively recovery (chart 1). Yet a V-shaped path for the economy—a brief recession, followed by a swift recovery—seems unlikely. The scale of job losses suggests the economy is in a hole too deep to climb out of quickly. Claims for unemployment insurance have dwarfed peaks in previous recessions (chart 2).

So why has the stockmarket rallied so hard? In part this reflects the Federal Reserve’s efforts to backstop the economy. It has bought bonds on an unprecedented scale, swelling its balance-sheet (chart 3). Bond yields have also become even paltrier (chart...