One of the most confusing things in the world of finance at the moment is the rapid recovery in many stock markets around the world after the sharp fall in February and March this year.

For instance, in the US, the S&P 500 has bounced 28% higher (as of 15 May 2020) from the 23 March 2020 low after suffering a historically steep decline of more than 30% from the 19 February 2020 high. In Singapore, the Straits Times Index has gained 13% (as of 15 May 2020) from its low after falling by 32% from its peak this year in January.

The steep declines in stock prices have happened against the backdrop of a sharp contraction in economic activity in the US and many other countries because of COVID-19. Based on news articles, blog posts, and comments on internet forums that I’m reading, many market participants are perplexed. They