Author: Trevor Hubner
The disconnect between the view of the markets and the broader economy (or perhaps more accurately, the media’s interpretation of it) continued with another positive week for most regions, many showing double digit rises. Tellingly, this rally was very much centered on “older economy” stocks and for once the technology sector lagged behind a little with the NASDAQ up a relatively modest 2.81% compared with a rise of 6.71c for the FTSE and 10.88% for the DAX.
The reason for the question about interpretation in the first paragraph is that markets continue to shake off the more doom laden predictions, with Friday giving perhaps the starkest example of this yet. I have written previously about how the economic data forecasts globally have been horrendous with UK GDP expected to drop by up to 20% over the worse of the crisis and other countries suggesting similar. In the face of such numbers it is indeed hard to be optimistic and yet markets continue to rise. I discussed various factors that are thought to be causing this last week, central bank policy, dominance of big tech companies and lack of alternatives being the main drivers, but Friday has made me consider if there is something else happening.
US employment data is one of the main economic figures each month. Known as Non farm Payrolls these are delivered on the first Friday of each month and record how many jobs have been added to the manufacturing, constructions and goods sectors. As the name suggests, more seasonal farm workers are excluded. It was widely forecast that Fridays numbers would be very bleak, consensus was that 7.5m jobs would have been lost during May, taking the jobless rate from 14.7% towards 20%. Following on from April, when 20.5m lost their job, this would have made the gap gap between Wall St and the real economy even wider. However, when published the numbers showed that far from the catastrophe forecast, the US economy had actually added 2.5m jobs with the unemployment rate had fallen to 13.3%. This was probably the biggest error of economic forecasting ever seen and the question has to be asked how analysts, who spend the month researching, can have missed the mark so widely. Could it be that even economists are influenced unduly by mainstream reports that rightly show the human cost of this virus and that economically, the situation is not as dire as it seems ? While it is difficult to distinguish between the economy and real life in a situation like this, could it be that markets are able to do this more efficiently than the individual ?
There will be no definitive answer until more data becomes available, but it must also be remembered that there is also a background of increased tension over US/China relations not to mention the domestic unrest in the US and pending election in November. All of these factors would normally be considered negatives, which you would expect to be reflected in market performance without even factoring in disruption caused by COVID. This landslide of bad news makes the stock market performance and the fact that business went on a hiring spree in May even more surprising, though obviously very welcome. It raises the question of who is right, the market or the media ?