How Can Equities Rally While Unemployment Rises?
An Oxford Harriman & Company Commentary
Equities rallied last week and even shook off the following headline quote on NBC News on May 7th:
” Another 3 million Americans filed jobless claims last week, bringing total to 33 million since coronavirus hit. "That's one in five jobs likely gone in seven weeks," said one labor economist.” 1
Clients have been asking how the market can be rebounding while employment falls to near depression levels. The common question is "How is this possible?"
There are seven factors we see as the reason why equities are rallying and why the financial markets seem to be functioning normally:
- The news is not as bad as feared. Although last week’s jobless claims were staggering, they were not as bad as many expected. Although 33 million people losing their jobs is terrible, many experts predicted far worse. Also, many earnings announcements have not been as bad as feared, and many companies have stopped providing short-term guidance, which may dampen the impact of next quarter’s numbers.
- Economies around the world, and the U.S. are starting to reopen, leading many to think we are approaching the bottom of the economic decline.
- Markets are hopeful the pandemic has peaked along with hope that the economy has bottomed.
- There is hope for more rapid testing, treatments, and vaccines in the short-to-intermediate-term.
- Individual investor sentiment is bearish at 52.7%. 2 This figure is known as a contrarian signal. When more than 50% of individual investors are bearish, the equity markets tend to advance, and this sentiment indicator has been above 50% for the last few weeks.
- Central banks continue to provide record amounts of support and liquidity to the markets, as well as support to their local economies.
- The markets are forward-looking, and they anticipate economic activity and earnings to be much stronger later in the year.
The above does not mean we are out of the woods as it relates to the economy. Despite the unprecedented support from the Fed, issues remain. First, the above points are just assumptions, and it is impossible to know which, if any of the above points are accurate predictions.
Second, some supply chains remain disputed, income and earnings are no longer predictable for both individuals and corporations, and questions are being raised about the ability of individuals, corporations and municipalities to service future debt service as a result of this crisis.
We will continue to keep you posted and hope you enjoy your week.
Dennis P. Barba, Jr.
President & Managing Partner
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