As unemployment rises, so does…the stock market?
It’s an equation that might not make much sense to market observers, but some strategists suggest it might not be as crazy as it sounds.
Markets rose nearly 2% on Friday, even as the Labor Department announced a record 20.5 million jobs were lost last month, as the unemployment rate jumped to 14.7% from 4.4%. However, unemployment data is considered a lagging indicator—meaning that it’s capturing data that’s already behind us.
Meanwhile, “the markets are always, always forward-looking, and the markets are trying to move ahead of the economy,” Randy Frederick, the vice president of trading and derivatives at Charles Schwab, tells Coins2Day.
Markets have risen steadily in the past month, with the S&P 500 up over 6% since early April.
Those like Mark Hamrick, chief economic analyst at Bankrate.com, point out that markets have long been mulling the worst case scenario in job data—and have adjusted accordingly: “We knew even upon release of the March employment report, where the unemployment rate rose from 3.5% to 4.4%, that this month was coming,” he tells Coins2Day. “There had to be the reckoning of disastrous statistics reflecting the real world, [and] we’ve had plenty of time to adjust for this reality.”
Others like Frederick note that “the greatest explanation” for the market’s recent resilience is “probably just the fact that the Fed, economists, and market analysts have done a pretty good job of trying to prepare everyone for these numbers being catastrophically large, being depression-level peaks or troughs,” he argues. “People have heard that again and again enough that, no matter how huge they are, they don’t react negatively as a result.” One bright sign: he points out that a large portion, over 18 million people in April, reported being on “temporary layoff”—a potentially positive sign that employment could rebound in the future.
Continued Fed support
One big reason analysts point to for the markets’ steady rise from its lows has been the unwavering, everything-and-the-kitchen-sink support of the Fed and central banks.
The Fed’s recent measures, which include rounds of quantitative easing, new programs, and rate cuts, have given investors plenty of support and security in the markets. “I’ve been calling this the ‘blank check Fed,'” Frederick laughs. “Investors understand that the Federal Reserve and other central banks have their backs,” Hamrick says.
Reopening the economy is in sight
To wit, some states are starting to slowly reopen, flushing the markets with new hope that the economy will snap back and jobs will be restored. “The market knows that the job losses are self-inflicted due to the widespread shutdowns,” Bleakley Advisory Group chief investment officer Peter Boockvar told CNBC on Friday. “Thus, now that we are beginning the reopening process the market assumes many of these people will hopefully get hired back over the coming months and quarters.”
Some states including Florida have slowly started reopening, and analysts suggest investors are more optimistic now—even though the likely-abysmal data from Q2 has yet to surface. “What the markets are telling us is that, ‘yes, maybe the worst of the economic data has not yet come,’ but the markets are looking several months down the road and saying, ‘are things going to be better? Yes they are,'” says Frederick.
Jobless claims are trending down
One of the more significant trends those like Schwab’s Frederick are noting is the steady decline in weekly initial jobless claims. While the numbers are still catastrophic (the latest weekly jobless claims came in at 3.2 million), those numbers have steadily decreased for five consecutive weeks now. They’ve “peaked, and almost inevitably the trend and direction of the data is more important than the absolute level,” he notes.
Winners and losers
But in this case, a rising tide doesn’t always lift all boats evenly, and analysts say they are seeing an even larger bifurcation between stock market winners and losers.
“Diving beneath the surface, although the S&P 500 as a whole remains down ‘only’ 11% for the year, many stocks are still down over 70%, while other stocks have already surpassed their all-time highs, reflecting investors’ attempts to pick out the winners from the losers within this awful health crisis,” Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance, wrote in a note Friday.
Some of those winners have certainly seen a run-up: Netflix and Amazon, for example, both posted all-time highs in April. And tech stocks have also enjoyed a rebound as of late, with the S&P 500 information technology index up 1.9% year to date. Meanwhile, stocks in airlines, energy, and autos have taken a beating.
But with markets up a solid 6% in the past month, the resilience should be encouraging, says Hamrick: “To the degree that the markets seemed to have found some footing is reassuring, because it at least gives the impression that some return to normalcy is occurring.” But, he adds: “But we also know that in the past, the markets have given false signals and have only sunk to previous lows or lower lows, so that’s not a guarantee.”
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