THE economic news is grim, so why are markets partying like its 1999?

It won’t have escaped anyone with access to a newspaper, the internet or a television set that the economic news of late has been unremittingly grim.

The Covid-19 pandemic, and the lockdown measures put in place to tackle the health crisis, have taken a heavy toll on both households and businesses, prompting pay freezes, job cuts and the scrapping of dividends to shareholders.

Many people remain in limbo about their futures with over 8.4 million employees, around 30% of the UK workforce, having been furloughed. A further 2.3 million have applied for grants under a separate scheme to provide income support to the self-employed.

Uncertainty around the outlook and the prospect of a collapse in earnings has prompted over £29 billion of dividend payments from UK listed companies to have been cancelled so far this year, squeezing the retirement income of many savers. Many other business have kept paying dividends but cut the level of their pay-outs including the world’s biggest dividend payer, Royal Dutch Shell, which has shaved its interim dividends for the first time since the Second World War.

When economists forecast that we are experiencing the deepest recession in a century, profits are turning to dust and dividends evaporating into thin air, it may seem surprising - even perverse - to hear that stock markets have been partying like it is 1999 over the last two months.

True, equity markets are still down year to date after the sharp declines in February through to late-March. But since their low point on 22 March, global equities have surged an impressive 33% in US Dollar terms and the UK market is up 19% in Sterling terms over the same period too. This places the UK market tantalisingly on the edge of being classified as in a new “bull market” which is defined as a trough to peak rise of 20% or more.

How can it be that markets are so buoyant in times of crisis, you may ask?

In truth, the relationship between the real economy and the stock market is not a straightforward one. In fact there is little correlation between GDP growth rates and stock market returns. The latter is more influenced by the flow of liquidity into the financial system than rates of economic growth. In this respect, the taps have been turned fully open to unleash an abundance of new cash and it is this we have to thank for rising share prices.

The scale and breadth of monetary and fiscal stimulus packages announced respectively by central banks and governments is truly staggering, outstripping in barely a couple of months what was delivered across the entirety of the global financial crisis.

At last count over $15 trillion of stimulus measures have been put in place around the globe and this is a continually moving target, with further packages being worked on including an additional $1.1 trillion budget package in Japan, a proposed €750 billion rescue fund for the EU and this week the European Central Bank extended it stimulus by a further €600 billion. It is estimated that all this new liquidity being created to address the crisis is equivalent to around a quarter of global GDP.

While many of these measures, such as grants and loans, will go directly to support struggling businesses, the slashing of interest rates and the vast programmes of bond buying by central banks in exchange for effectively printing new money have a direct impact on financial markets.

Central banks purchasing enormous amounts of bonds keeps bond prices high and consequently borrowing costs low and in turn provides confidence to investors that the world’s central banks have their backs. It is the presence of this huge wall of cash providing a powerful backstop that has helped turbo-charge the returns on financial markets.

Markets are also inherently always looking down the line at the future rather than telling you what you can readily see around you today. Having priced in the prospect of a global recession at frightening speed in late February and March, investors are now try to look across the other side of the valley to the recovery stage. In recent weeks, share prices have been buoyed further by evidence of slowing Covid-19 infections, optimism around vaccines and treatments, the prospect of economies reopening and even more stimulus.

Stock markets do however have a tendency to overshoot, as investor sentiment has a habit of lurching aggressively between hope and fear and these can be as infectious as a virus.

Right now, hope is firmly back in the driving seat. While overall equities are trading at fair value, in parts of the market there are worrying bubble-like characteristics being exhibited, notably in the tech sector which has led the recent rally.

The big six mega tech stocks – Microsoft, Apple, Facebook, Alphabet, Amazon and Netflix – now account for over 20% of the entire US stock market by combined value and are collectively worth more than the entire stock markets of any non-US country with the exception of China. These are undoubtedly impressive businesses that have weathered the pandemic well but they are trading on an eye watering average of 45 times next year’s forecast earnings.

The world will eventually emerge from this crisis and the gradual reopening of economic life has already begun. Stock markets can continue to recover as companies rebuild profits and dividends next year.

However, it would be folly not to recognise that there will be relative winners and losers from the crisis and some businesses won’t survive. There will also be potential setbacks on the way if news on vaccines disappoints, or a second wave of lockdowns is required.

It is therefore important to tread with a little care, not assume the recent rally will carry on in an unbroken fashion and to see any pullback from the recent exuberance as an opportunity.

Jason Hollands is managing director of wealth management group Tilney