Main Street thinks Wall Street is crazy. Wall Street thinks Main Street is going to be relatively good.
This is the apparent message after the Dow Jones Industrial Average
Values jumped more than 400 points on Friday and stocks continued their steamy rebound despite data showing that the US economy lost more than 20 million jobs in April. Closures to contain the deadly COVID-19 pandemic pushed the unemployment rate to 14.7% – a post-war peak which economists say probably underestimates the devastation.
Read: Great Depression 2020? Unofficial U.S. unemployment rate is at least 20% – or worse
Advisors and analysts say they have been inundated with calls from customers asking why stocks continue to soar as economic data deteriorates day by day.
They have a list of well-used reasons: the market is looking to the future and has already anticipated a brutal but short recession; there are signs that the epidemic has peaked; progress towards treatments and even, potentially, a vaccine; the triggering by the Federal Reserve of unprecedented monetary stimulus and loan guarantees, with the promise to do more; and a spate of federal spending to shore up workers and businesses, albeit while drawing mixed reviews.
But the test will be whether the consumer – long the main driver of the US economy – will be reborn after being virtually, if not literally, locked up during the pandemic.
“It will depend on consumer spending. If we all sit inside and don’t spend money in September-October, the market won’t like it – the market will go down,” said Scott Wren, senior strategist of global markets to the Wells Fargo Investment Institute, in a telephone interview.
Whether consumers spend or lock themselves up in the fall will, of course, depend largely on how the pandemic unfolds. As infections and the death rate in New York, the center of the epidemic in the United States, and other urban hotspots have declined, epidemics have worsened in other parts of the country. Meanwhile, several states have started to relax the restrictions or make plans to do so.
Several states have even seen protests against the foreclosure measures, arguing that the damage to the economy outweighed the potential damage from the virus. Public health experts have argued that the reopening process must be undertaken with caution to avoid a second wave of contagion.
And some economists and investors have argued that efforts to contain the virus, while economically painful in the short term, will avoid the much deeper economic blow that would occur if the spread were to re-accelerate.
Indeed, Bryce Doty, senior portfolio manager at SIT Fixed Income Advisors, argued that the stock market was boosted by Friday’s dismal job numbers precisely because investors see the short-term decline in employment as a sign of the country’s determination to contain the pandemic.
“The closures have provided the necessary protection and have significantly slowed the spread of the virus, even in the densest regions of the country, so stocks will increase in response to an unemployment rate of almost 15%,” said a- he said in remarks sent by email. “The jobs report marks a moment of reflection in our history, [it] Probably also marks the bottom of the economic contraction, with the hope of a better rest of the year. “
Some market watchers see a bumpy road, saying that the recovery is valuating at best that could easily be derailed by a further increase in infections or a sign that the economic rebound will not be so rapid. This could put pressure on policy makers to take further action amid growing partisan tensions in Washington.
“The challenge today is for the Fed and Congress to get ahead of this crisis as it unfolds. After a good start, there is a big risk that they will fall behind and the sudden shutdown of the economy turns into a prolonged slump that would be ruinous, “said James McCann, senior global economist at Aberdeen Standard Investments, in an email.
The S&P 500
plunged nearly 34% from the February 19 record near its March 23 low. The rebound that followed left the large cap index just 13.5% below its highest closing price on Friday.
Meanwhile, a look under the hood of the market is also revealing, with first quarter results and performance showing that investors continue to distinguish between the “haves” and the “have-nots”. In other words, investors favor stocks of companies on the brink of coping with the pandemic and closings, while being wary of stocks of companies more sensitive to the economic cycle.
The technology and non-cyclical sectors are on track to increase profits by 3.2% on average in the first quarter, said Larry Adam, chief investment officer at Raymond James, in a note on Friday. The cyclical sectors, which closely follow the ups and downs of the economy, should however experience a contraction in profits of 34.7% on average in the first quarter and 81.6% in the second quarter.
This has been accompanied by the tech and healthcare sectors reaching new relative highs compared to the S&P 500, while financiers and industrials are lagging behind, he noted.
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The Dow Jones registered a 2.6% gain last week ending Friday at 24,331.32, while the S&P 500 rose 3.5% to 2,929.80. State-of-the-art Nasdaq composite
outperformed other major indices, wiping out its 2020 loss (up 1.7% from the start of Friday) over the past week, as it rose 6%.
So where to go from here? No one really knows, of course, and the scale of the March 23 low rebound surprised even some bulls.
But history shows that a significant short-term decline would not be a surprise, given the market’s tendency to drop 10% every 11 months or so, Wren noted. Meanwhile, further positive developments on the consumer front may be needed to propel the S&P 500 through resistance to its 200-day moving average, which stands at 3,001.98 after Friday’s close, it said. -he declares.
Meanwhile, the coming week will bring additional economic data, including an overview of April Friday’s retail sales. There is no doubt that these figures should be particularly ugly, with economists predicting an average drop of 8.7% in sales and a drop of 4.5% in sales excluding cars.