How Has COVID-19 Affected North American Stocks?
The coronavirus (COVID-19) didn’t just take the wind out of the sails of the longest bull market on record, it kicked it over a cliff. Because of the coronavirus pandemic, the global economy is virtually at a standstill, and the supporting economic data has been abysmal. Despite this, the stock market has been on an impressive run since being routed in March. This begs the question, are investors being too optimistic? Or, as many are suggesting, is the worst yet to come?
Since the markets were gutted in March, the S&P 500, Nasdaq, Dow Jones Industrial Average, and TSX have all experienced strong gains. The S&P 500 is up an impressive 26% since March 23, the Nasdaq has advanced 25%, and the Dow Jones Industrial Average has climbed 28%. Over the same time frame, the TSX has jumped 27%.
Keep in mind, the stock market is a forward-looking indicator, which means, investors look at leading economic indicators to base how they think the broader stock market is going to do. Some of the leading indicators include interest rates, unemployment rates, and the Price Managers Index (PMI), which surveys senior executives in the private manufacturing and services sector.
Suffice to say, there is a massive disconnect between what the economic data is suggesting and what the stock market is doing.
The Stock Market Is Bullish Despite Awful Economic Data
Case in point, the U.S. Department of Labor announced that 4.4 million Americans filed their first unemployment claims in the week ending April 18. While that’s down from the 5.2 million in the prior week, it’s the fifth consecutive week over three million. An eye watering 26.5 million Americans have filed for jobless claims over the last five weeks.
Before that five-week stretch, for the week ending March 31, there were already 7.1 million unemployed Americans. Taken together, this means more than 33 million Americans are unemployed, which translates into a real unemployment rate of 20.6%. That’s the highest U.S. real unemployment rate since 1934.
How did investors react to this dismal unemployment news? They pushed the markets higher.
COVID-19 is taking the same kind of toll on Canadian jobs. In March, more than one million Canadians lost their jobs, with the unemployment rate soaring to 7.8% from 2.2% in February. In Alberta, it is thought that the unemployment rate will reach 25%.
The economic data coming out of Europe is just as bad, with the PMI in free fall. The Eurozone composite PMI hit 13.5 in April, down from 29.7 in March and was the worst reading on record. To put that number into perspective, during the 2008-2009 financial crisis, the lowest reading was 36.2. Anything below 50 shows that activity is shrinking. PMI readings from Japan and the United Kingdom are also the worst on record.
The data from April is expected to be even worse. For much of March, many businesses were still open. That’s not the case in April.
Can the Stock Market Continue Making Strong Gains?
Recent stock market gains have not been entirely broad-based. Some sectors are performing better than others. The biggest gains have come from technology, healthcare, and staples, which benefit from low-interest rates, quantitative easing, and trends that include working from home.
As it stands, investors seem to be optimistic about where the economy and corporate profits will be in a few month’s time, which suggests investors believe the recovery will be “V” shaped, pointing to a quick economic turnaround once the global economy opens back up.
You have to admire their optimism. But the fact remains, there is still too much uncertainty about when the markets will open, if global economies are going to open up prematurely, and how long the recession will last.
There is also no guarantee that COVID-19 will not return. In fact, the head of the Center for Disease Control and Prevention (CDC) warned that a second wave of COVID-19 is expected to hit the U.S. next winter and Toronto’s top doctor also suggested a second wave is likely.
That might explain why in addition to the broader markets rising, so too are the number of short sellers betting against the S&P 500.
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Despite terrible economic data coming in from around the world, Canadian and U.S. stocks have been trending significantly higher. This disconnect suggests investors may be too optimistic and that stocks will continue to face serious headwinds over the coming quarters. Regardless, the trading experts at Learn-To-Trade.com can teach investors how to profit no matter what the broader markets are doing.
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