It was the best week, and it was the worst week.
To start with the “worst”: we learned that an additional 6.6 million people have filed for unemployment for the first time, for a count of more than 16 million over three weeks and bringing the unemployment rate to 10% or more, although likely, underestimates the number of people who have been unable to access overburdened state unemployment systems.
The “best” part may have been just as disturbing. Equities had their best week in more than four decades, with the Dow
up 12.67%, the S&P 500
gaining 12.1%, and the Nasdaq
In fact, two sectors of the S&P 500 had their strongest week ever. The graph above shows the performance of the sector, with data from Dow Jones Market Data. The real estate sector was only launched in 2016; historical data before that is back-tested. All other industry data goes back to 1989.
First, it is important to note that many strategists believe that the markets have not fully grasped the extent of the devastation that the coronavirus will cause to the economy, let alone the human toll. And for now, the unprecedented actions of the Federal Reserve and other central banks are helping to put investors to sleep.
“Inventories are up because the damage to the economy – evident in the claims – is beyond comprehension, while the Fed’s response is easier to understand,” wrote Chris Low, chief economist of FHN Financial, in a note released Thursday after the jobless claims. The data.
And most strategists think stocks will probably go down from here. Investors have yet to experience a real “capitulation,” Kim Forrest, founder and IT director of Bokeh Capital Management, told MarketWatch. Goldman Sachs analysts agree.
Yet there may be some historical context for understanding what is going on.
In an analysis published Thursday, investor Ned Davis notes that the stock market does better than average when unemployment rises. Davis’ research shows that an unemployment rate above 6% is correlated with a stock market rise of 13.7% per year.
“How can this be?” Davis wrote. “It defies logic. My explanation would be that this news is widely followed and that the market tends to look to the future. It is therefore probably included in the price. “
It’s also probably largely due to the central bank’s punchbowl, Davis added. A very high unemployment rate “can push the Fed to overwork in terms of profitability and availability of money … When the Fed helped investment grade bond yields to plummet, it was a good buy signal for actions.
On Thursday, the Fed promised more support for higher quality bonds and limited support for lower quality debt.
Related:Fastest-Growing American Credit Lines
Nicholas Colas, co-founder of the investment research store DataTrek Research, also reflected on the link between the real economy and the markets, in an analysis released Friday. “The money show is at the intersection of public confidence and government responsibility,” wrote Colas.
“It is tempting to think that the Fed’s actions today mean that US stock prices will only go up from here: when you remove the risk of short-term bankruptcy for each public company, whatever either the credit rating or the short-term financial situation, asset prices should go up, “added Colas.” The markets know that no matter how bad the cash flows, a backstop from the Fed is behind the scenes if necessary.”
In addition, he said, “the Fed knows it needs to keep equity markets stable on the upside in order to keep the 40% of Americans who hold stocks liquid and confident enough to trigger a recovery in spending. consumption. This is the classic wealth effect, which the Federal Reserve understands. “
It should be noted that while 40% of Americans own stocks, 60% do not. And not only these people do not causing gradual recovery, they may simply try to keep the food on the table.
See:Individual investors have $ 1.5 trillion in cash on hand, says J.P. Morgan. And then?