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Is the Stock Market Insanely Disconnected From Reality?

The Toronto Stock Exchange (TSX) fell to its lowest level on March 23, 2020. Because of COVID-19’s devastating impact, many have given up hope for a rally this year. Only a coronavirus vaccine will save the market from further collapse. But strange things are happening and vitality is back.

Canada’s main stock market index is slowly paring down the losses. The index has risen by 35.27% since that fateful drop.  It’s unexpected and sudden, as the rally occurs while the economy is heading into a deep recession.

The situation is the same on the S&P 500 Index across the border. Is there no more connection between the stock market and the economy? Have the markets been disconnected from reality?

Interest rate cuts

Like other central banks, the Bank of Canada implemented emergency interest rate cuts to shield the economy from the COVID-19 fallout. Canada’s central bank slashed rates three times in March 2020. Its benchmark interest rate of 0.25% matches the 2009 level during the global financial crisis.

Fundamentals not in sync

A noticeable outcome of the pandemic is the loose link between stock prices and fundamentals. The stock market is forward-looking — or perhaps investors are optimistic about a vaccine coming. Hence, despite a slumping economy, equities are surging.

Stocks are better investments

With bond yields so low, there’s no better alternative than stocks. However, you shouldn’t choose just any company. Your best bets are companies that are outperforming the general market in the wake of the health crisis.

A hands-down choice is Jamieson Wellness (TSX:JWEL). The takeaway is obvious. This $1.35 billion company manufactures and sells natural health products in Canada and other parts of the world.

As of this writing, this consumer-defensive stock is trading at $34.30 per share, or a year-to-date gain of 34.25%. Sales during the first quarter of 2020 have been anything other than brisk. Immunity products are in high demand and top-sellers.

The quarter saw a significant increase in new customers across all markets. Revenue grew by 17% versus the same period last year. The adjusted net income growth and adjusted EBITDA growth were 21% and 15%, respectively. Increased consumer focus on health and wellness was the growth driver.

Jamieson expects to finish 2020 with top-line growth of 5.5% to 9.9%. Market analysts recommend a buy rating and forecast a price appreciation of 10.78% in the next 12 months. The stock also pays a 1.28% dividend.

Massive stimulus package

The stock market is not out of sync with reality. Let us not forget that the TSX will not rebound if not for the federal government’s monetary and fiscal responses. Canada’s COVID-19 Response Plan is worth billions of dollars. Businesses and households would be insolvent by now without the various emergency aid programs.

The massive stimulus package’s downside is that it will hurt the economy and swell the fiscal deficit. But the upside is that it will not paralyze the economy. Since the economy is restarting, the stock market should behave the way it should.

Speaking of stock market's strange behaviour during the pandemic...

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Fool contributor Christopher Liew has no position in any of the stocks mentioned.

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