Rising Markets, Growing Despair: How Two Worlds Coexist
There’s still no vaccine for the coronavirus. Around 40 million Americans are out of work. Our country’s economic output is expected to fall as much as 50% this quarter. Now there are riots in most major cities. How can the markets continue to climb higher given these?
It’s a question that continues to perplex investors.
Any one of those challenges should have been enough to pull the markets lower. All of them occurring at once should have obliterated the market.
But here we are.
From the March lows, stocks have jumped 35%.
Since that rally started, 40 million Americans lost their jobs, economic output has fallen an estimated 50%. We still don’t even have a vaccine.
Jeff Cox, a contributor to CNBC, says the way investment decisions are made today likely plays a major role in the market’s ability to shrug off seemingly endless bad news.
He says, “In a market increasingly driven by dispassionate computers that run on algorithms, and investors who at least in theory are always looking ahead, the tendency to gaze beyond the news of the moment is always there.”
Quincy Krosby, chief market strategist at Prudential Financial, agrees with Cox. Krosby adds, “The market always seems heartless, without any emotion, without caring, without empathy. But that’s the nature of the market. The algorithms almost certainly have no shred of empathy. They’re not supposed to.”
The Year 1968
For many, it may seem like this is the first time our country has faced this many obstacles at once, but Tom Lee, head of research at Fundstrat Global Advisors, says there is a historical precedent for what is occurring today.
“1968 was the year that ‘shattered America’ and many tumultuous events and violence took place in that year. And despite that, the equity markets managed to perform solidly. 1968 is a reminder that stocks and world events are not always connected.”
That year, the country grappled with the assassinations of Rev. Martin Luther King and Robert F. Kennedy, the North Vietnamese launched the Tet Offensive, people contested the 1968 presidential election between Hubert Humphrey and Richard Nixon, and protests sprang up around the world. It's also when the H3N2 “Hong Kong flu” pandemic killed nearly 100,000 Americans and millions more globally.
That year, the S&P 500 fell 9% from January to March, and then rallied 24% to end the year up 7.6%.
Comparing 1968 to this year, we saw a much larger dip from January to March. However, we’ve also seen a much stronger rally off the lows.
Despite the market’s ability to levitate above any bad news, Nicholas Colas, co-founder of DataTrek Research, says it might only take one bad data point to bring the whole thing crashing down.
“What matters to markets right now is how/when the US economy restarts from COVID Crisis shutdowns,” Colas wrote. “If protests or political spillover start to hurt consumer confidence, that would spell lower stock prices for a longer period than a week or two.”