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Lockdowns in many economies around the world since March, and a sharp rise in U.S. unemployment, prompted a 30% drop in stock prices. However, the U.S. stock price rebound in the first half of June 2020, in spite of economic projections of sharply lower, perhaps negative economic growth and business profits for 2020, surprised many. If the price of a company’s shares reflects the discounted present value of future cash flows to shareholders, this stock market recovery makes little sense. However, there is a second important determinant of stock prices—the amount of money made available in the hands of investors by central banks. In recent decades, central banks have reacted to sharp stock market declines by pumping money into the economy through “quantitative easing” (QE) programs to buy government and corporate debt. The size of assets on central bank balance sheets is a measure illustrating this. See Fig. 1 for a time series of total consolidated assets on the U.S. Federal Reserve System (FRS) balance sheet from December 2002 to June 2020. In 2008, the FRS assets more than doubled from US$901,710 million on August 6, 2008, to US$2,212,852 million on November 12, 2008. As the risk of widespread bankruptcies in the financial sector subsided, the stock market responded to this massive injection of money in the following year by recovering a large part of its losses and rising well above the 2008 levels. The COVID-19 pandemic also induced an economic panic in March 2020. The FRS responded to the panic by again expanding its balance sheet assets by 66%, from US$4,241,507 million on March 4, 2020, to US$7,037,258 million on May 20, 2020: not surprisingly, the stock market soon recovered most of its March–April 2020 losses during May–June 2020.

How did the U.S. stock market recover from the Covid-19 contagion?