Any explanation for the COVID-19 market surge?

A key point to understand is that markets respond not just to the immediate economic environment but mainly to expectations for the future. Stocks have an indefinite lifetime (no fixed maturity) and so they are affected by long-term expectations. With P/E ratios typically in double digits, stock prices try to anticipate decades of earnings.

From this long-term perspective, almost all crises are viewed as survivable, and the focus is on the implications of current events for the future economic trajectory. It was a reasonable presumption that Covid, like other pandemics, would ultimately end. Even if economic activity was highly depressed for a couple of years, it would likely bounce back quickly, and this would make only a ~10% dent in overall earnings-based valuations. And the knowledge-driven economy had tools to mitigate the impact of social distancing on productivity, like high-speed home internet and videoconferencing, that did not exist in the past.

Thus, after the market slide in February-March 2020 from the initial shock and uncertainty about the virulence of Covid and the extent of shutdown plans, the market reequilibrated as Covid showed indications of being comparable to previous pandemics, not something uniquely disastrous.

But an additional key factor was the government fiscal and monetary response. Determined to avoid the risk of an economic depression, the government overcompensated with huge economic stimulus in the form of additional unemployment payments, tax rebates, business loans, and zero interest rates. Proceeding through 2020 and 2021, consumers spent their stimulus checks -- and also increasingly invested them in popular stocks, fueling the market rally more directly as well.

Covid was disastrous in a human sense -- 1 in 300 Americans killed, many weakened for extended periods, essential in-person workers and especially health-care providers facing stressful and sometimes unbearable conditions. From an economic standpoint, trends were driven by the majority who were less directly affected by Covid. For some, the massive economic stimulus turned life almost into a game, an extended party of loose spending. The stock market reached new all-time highs.

And after the party came a hangover. The economy was overheated, with demand (fueled by stimulus) outstripping supply (limited by the difficulty of in-person work and reduced global mobility of people and goods). As 2022 arrived, with growing inflation and labor shortages, and signs that the pandemic itself was remaining in check rather than spiraling out of control, it was time to withdraw the stimulus. Extra payments from the government stopped and interest rates rose, reducing estimates of the present value of future earnings. Thus, what was good news in one sense (reduction in deaths and return to social normalcy) turned into a significant negative repricing of the stock market relative to its feverish stimulus-driven peaks.

Overall, as is typical with other events, the stock market trends during Covid had much more to do with the societal reaction to the pandemic than with the course of the pandemic itself.

In my mind there are three big reasons for the rise in the US stock market during that time:

1. Interest rate cuts increased the present value of future earnings, and reduced the required rate of return for equities as an alternative investment to bonds, both of which raised equity values at a fundamental level

2. $4.5T in government stimulus artificially driving up demand in the overall economy and, to some extent, investment in stocks.

3. Large companies with online presences benefited significantly more from the lockdowns compared to smaller local stores, which aren't represented in the major stock market indices.

As the pandemic wore on, there were supply chain issues which, coupled with lower government stimuli, reduced supply and demand, respectively, causing a slowing of economic growth.

The growth curve right now looks very similar to what we saw then, which has me assuming that most or all of my paper gains in the past year will evaporate fairly suddenly a few years from now

I can't say that won't happen, but I don't see the same underlying causes for recent growth. I believe that AI had caused both an increase in investment for tech companies and an increase in productivity even in non-tech companies. Whether either or both of those is sustainable is yet to be determined.

One important factor that has not been touched on yet is there was a giant surge of retail investors during COVID. A quick google search comes up with a figure that 15% of retail investors started investing in 2020.

With people locked inside and bored, a whole slew of hobbies saw a huge increase in participants and a huge swath of prices of goods related to those hobbies increased with it. From guitars to TCGs. The gamification of the stock market by companies like Robinhood meant that equities also participated in this broader retail trend. And just like those other markets, more people chasing the same number of goods means prices go up.

Mass Death, Recovery, and Supply Chains

If you check out the S&P 500, there's a big dip in early 2020, then a sustained climb until the beginning of 2022, and then a smaller, longer decline that takes about 18 months to recover from.

That timeline lines up pretty well with

1. Initial panic around the mass death of early COVID (early 2020)
2. Recovery as everyone adjust to COVID and government stimulus (second half 2020, all of 2021)
3. China and Russia cause massive supply chain disruptions (2022)

Russia

The Feb 2022 Russian invasion of Ukraine had a huge impact on global supply chains - Russia was a major supplier of oil and natural gas - especially to Europe, and Ukraine exports a massive amount of food - it was the #1 source of sunflower seeds (used for seed oil), #4 for barely exports, and #7 for wheat exports.

Commodity wheat prices doubled in March 2022.

And when Europe placed sanctions on Russia, energy prices spiked across the continent. Some European countries saw (temporary) energy price hikes of 75%.

Post invasion energy prices in Europe spiked for nearly a full year, and the averaged out to be about a third higher than before the invasion.

This impacted both European industrial production, and European consumer demand.

China

China has been the world's factory for many years now. China choose to pursue a zero-COVID policy that required repeated large scale lock downs to control the virus, in sharp contrast to the Western world where things rapidly returned to near normal after the vaccine was widely available.

These lock downs closed factories, and also shut some of the largest ports in the world for weeks at a time - here's a CNN article from March 2022 about how costly that is.

By November 2022, China was experiencing (very rare!) protests against zero-COVID.

Supply Chains

Global supply chains were already strained by the rapid shifts in 2020 -- remember when hand sanitizer was out of stock everywhere?

Massive shortages in necessity items - food and fuel - combined with further disruptions when lock downs in China dragged on for far longer than needed only added to the pressure.

The result was high inflation - which peaked in June 2022 at 9.1% and global economic pain.

I find arguments that there was a "hangover" from the government stimulus to be unconvincing.

There's a simple "supply and demand" story here where events in 2022 combined to make it harder to afford just about everything just about everywhere - and that's why the stock market doesn't look so great in 2022.