Opinion | The Mystery of High Stock Prices

From the Department of Curiosities: On Tuesday, as the number of new coronavirus cases continued to spike to record levels, the stock market closed out its strongest quarter in more than two decades.

That was just one stop for the equity markets on a spring roller coaster ride, three months that saw the fastest 30 percent decline in stock prices in history, followed by the fastest 50-day increase on record.

This year’s volatility may be extreme, but it’s only the latest of many seeming disconnects between stocks and the economy. In March 2009, for example, while reported monthly job losses were topping 700,000, share prices abruptly ended their 17-month decline and began a recovery that essentially lasted until the virus arrived.

What gives? Why has an economy that has experienced the biggest collapse since the Great Depression not — at least to date — inflicted any lasting damage on a market that is often expected to reflect the state of the economy or, at least, of corporate profits?

Some hold the view that the economy’s troubles will be short-lived; a V-shaped recovery will soon unfold and the stock market is merely looking ahead. Others cite the upsurge in buying by small individual investors.

My vote for the most significant driver of stock prices is the huge amount of liquidity that the Federal Reserve has injected into the financial system, in an effort to counteract the depressive economic impact of the virus.

That has pushed interest rates to record lows, turning money market funds, bonds and other fixed-income instruments into low-returning investments. The Standard & Poor’s index of 500 stocks, for example, currently has a dividend yield of 1.9 percent, compared with 0.7 percent for 10-year Treasury notes.

Unusually, an investor can now make more in current income from stocks than from high-quality fixed-income securities while participating in any future appreciation in share prices. (Yes, while stocks can also go down, over the long term, they have always appreciated.)

Coincidence or not, the day the Fed announced a massive injection of liquidity, the plunge in the market abated and the extraordinary recovery in stocks began.

“Don’t fight the Fed” has been a mantra for investors for decades. During the tenure of Alan Greenspan as Fed chairman, the notion that the Fed would provide a fire hose of liquidity whenever a crisis threatened became known as the “Greenspan put.”

In fairness, the Fed is not the only factor influencing the market. Individual investors, known for their often poor timing of entry and exit points, have been trading actively, aided by commissions that major online brokers have dropped to zero.

That has created some weird anomalies: After pandemic losses drove Hertz shares below $1 and the company filed for bankruptcy, small investors piled in and sent the stock briefly above $5, even though shareholders…