It’s always next to impossible to pinpoint precisely what the stock market has priced into valuations. Although right now, equities strategists would universally agree the market has factored in two quarters of outright economic ugliness in the United States at the hands of the deadly coronavirus.
The wild cards sitting here today is how the market will react to finally receiving the economic dread it has come to expect since the health pandemic erupted in early March. And then, has the market bounced too hard from the March lows on the expectation of V-shaped economic recovery later this year that may not appear, given the realities of a post pandemic world?
“I think the expectation of market participants is that we’re in the Great Depression and that in a sense, the news can’t get much worse,” said BNY Mellon chief strategist Alicia Levine on Yahoo Finance’s The First Trade.
To Levine’s point, it’s interesting to see the market continue to rally in the face of brutal reads on the U.S. economy. It only fuels the thesis that the bottom in the markets formed on March 23, which may be a flawed view. The latest upbeat market response arrived on Thursday as the Dow Jones Industrial Average climbed more than 300 points in the face of news that another 4.427 million Americans filed for unemployment benefits.
Since mid-March, 26 million more people have applied for jobless benefits. This would mean an unemployment rate of 20.6%, per math from MUFG chief economist Chis Rupkey, who points out the rate is closing in on Great Depression levels where a quarter of all jobs are lost.
“It is going to take years not months to put these pandemic jobless workers back to work at the shops and malls and factories and restaurants across the country. What are stock market investors thinking? There’s at least 33 million people out of work in the country. Investors should be running for their lives,” Rupkey contends.
Rupkey notes the stock market fell 57.7% at the worst point of the Great Depression. The S&P 500 was only down 13.3% year-to-date through Wednesday’s close of trading.
‘I would be hedging myself’
Moreover, big cap tech stocks such as Microsoft, Apple, Amazon and Netflix continue to trade as if this was the 2019 economy, not one where a quarter of jobs in America have vanished within two months. The Nasdaq 100 to S&P 500 ratio has climbed back to 2000 dot com bubble highs, points out researchers at SunDial Capital.
At some point soon, the market could be forced into pulling off its rose-colored glasses. Sure, extraordinary stimulus from the Federal Reserve is a major backstop to equities as history has proven again and again. But for investors to completely ignore jarring information on the economy seems absurd.
“I would be hedging myself in this marketplace. There is still a lot of uncertainty, there is an outstanding number of people that are not working right now,” says Advisorshares CEO Noah Hamman. “I’m optimistic that the economy is going to turn around. But it doesn’t mean that the stock market is going to follow along with it.”
Sounds like reasonable insight inside of a Great Depression.