Cumulative number of jobless claims since March 21, weekly
S&P 500, cumulative percentage change since its 2020 low on March 23
+31%
30
million
30
%
30 million
claims in
six weeks
20
20
10
10
0
0
April
May
April
May
Sources: Department of Labor; FactSet
Cumulative number of jobless claims since March 21, weekly
S&P 500, cumulative percentage change since its 2020 low on March 23
+31%
30
million
30
%
30 million
claims in
six weeks
20
20
10
10
0
0
April
May
April
May
Sources: Department of Labor; FactSet
Cumulative number of jobless claims since March 21, weekly
S&P 500, cumulative percentage change since its 2020 low on March 23
+31%
30
million
30
%
30 million
claims in
six weeks
20
20
10
10
0
0
April
May
April
May
Sources: Department of Labor; FactSet
Cumulative number of jobless claims since March 21, weekly
30
million
20
30 million
claims in
six weeks
10
0
April
May
S&P 500, cumulative percentage change since its 2020 low on March 23
+31%
30
%
20
10
0
April
May
Sources: Department of Labor; FactSet
The latest jobs report revealing record U.S. unemployment highlights a growing rift investors are struggling to reconcile: a rallying stock market and stumbling economy.
Gains in U.S. stocks accelerated Friday after April’s nonfarm payrolls report showed unemployment rose to 14.7%, the highest level on record. It was the latest head-scratching development for many market observers, who have been parsing a steady stream of abysmal economic data while watching the U.S. stock market stage a recovery.
In a matter of weeks, a decade of job gains has been erased. Meanwhile, consumer spending has plummeted as businesses have been shut down around the country and manufacturing activity has contracted at the sharpest pace since the last recession.
The disconnect between the economy and stock market grew more stark this week. The technology-heavy Nasdaq Composite Index entered positive territory for the year, erasing much of its losses from the coronavirus-fueled rout. Other major U.S. indexes also notched strong gains for the week. The S&P 500 rose 3.5%, while the Dow Jones Industrial Average advanced 608 points, or 2.6%. The Nasdaq Composite added 6% for the week.
All three indexes have rallied more than 30% from their March 23 lows.
What is driving this gap? One common wager: Current data on the economy is terrible but it is bound to improve.
1. Bets on a “V-Shaped” Recovery
Many analysts are looking past the grim economic data, forecasting a speedy recovery as state economies open back up across the country.
New York, which has been the hardest hit by the pandemic, has begun developing a plan to restart its economy. Other states are farther ahead, with more than 20 allowing some businesses to reopen. Nevada’s Gov. Steve Sisolak said some businesses including dine-in areas of restaurants would be allowed to reopen Saturday with social distancing and occupancy limits. Those moves have encouraged investors that the economy is poised for a rapid rebound by early 2021.
Additionally, the number of new Covid-19 cases has moderated in the U.S. And stocks have surged on any signs of progress toward a potential vaccine.
“People are making the bets….that this is the bottom,” said R.J. Grant, director of equity trading at KBW. Still, he said, “The market is really divorced from economic reality right now.”
Plus, many investors said Friday’s unemployment numbers and other disappointing data came as no surprise after data in recent weeks showed a flood of people applying for unemployment benefits.
Still, analysts are watching for any minute signs that the bottom of the economic downturn is near. Goldman Sachs Group Inc. analysts have been tracking varied measures such as gas demand, Starbucks mobile application downloads and traffic in restaurants as measured on the reservation website OpenTable for signs of a recovery. Gas demand, though it has fallen tremendously, started improving over the past week, while other data tracking flow through workplaces and transit showed small gains as some states have reopened.
“There are some small, early signs that life is resuming some form of normalcy,” the analysts said in a research note Thursday. “We expect these small signs of recovery to continue as the country gradually reopens and consumers resume their daily activities.”
A drive-up job fair in California earlier this week. April’s nonfarm payrolls report showed unemployment rose to 14.7%, the highest level on record.
Photo: Chris Carlson/Associated Press2. Market Leaders Keep Rising
The stock market is increasingly divided between the haves and have-nots, and the recent rally reflects the outperformance of a handful of stocks. Big technology companies, which are heavily weighted in the indexes, have driven much of the rebound, continuing a trend that was prevalent during the nearly 11-year bull market.
“The whole market is not up,” said Giorgio Caputo, a portfolio manager at J O Hambro Capital Management, who said his firm has added to stockholdings in recent months. “It’s the best of times for some firms. It’s the worst of times for other firms.”
Five big tech stocks— Microsoft Corp., Apple Inc., Amazon.com Inc., Alphabet Inc. and Facebook Inc.—together make up about 20% of the S&P 500. Those companies have benefited as Americans around the country have been sheltering from the pandemic at home, spending time on social media and ordering home essentials such as groceries online.
Amazon and Microsoft are leading the way, with gains of 29% and 17%, respectively, this year.
An Apple store in New York. Apple and other big tech stocks have helped support the S&P 500.
Photo: eduardo munoz/ReutersMeanwhile, the entire energy sector constitutes just about 3% of the broad stock-market index. That means the companies that have suffered the most have little sway over the market’s direction. The energy sector is down 35% this year, in conjunction with a plunge in oil prices, making it the worst-performing group in the market.
Another way to gauge the outsize influence of the biggest stocks: The S&P 500 is down 9.3% this year, while a version of the broad stock-market index that gives every company an equal weighting has been battered even more, falling 16.8% this year, FactSet data show.
The growing divergence between the market’s winners and losers reintroduces another risk: A sudden exodus from the tech darlings could easily drag the market lower. Analysts have high expectations for their growth, so any perceived disappointment would heavily weigh on the broader market.
3. Corporate-Earnings Expectations Remain High
Earnings have been abysmal and the coronavirus has already pushed companies from J.Crew Group Inc. to Neiman Marcus Group Inc. and Diamond Offshore Drilling Inc. into bankruptcy. But investors are counting on a quick rebound.
Earnings are expected to register a decline of 14% in the nearly completed first-quarter earnings season, which would mark the biggest decline since 2009, according to FactSet, before falling further later in the year. Analysts are projecting earnings to bottom in the current quarter with a 41% drop—and rise 13% in the first quarter of next year.
“While the earnings outlook will remain challenged at least through [the first half of 2020], investors are increasingly discounting the Covid-19 hit to fundamentals this year and turning their gaze to a 2021 recovery,” JPMorgan Chase & Co. analysts wrote in a note recently. They added that they are bullish on stocks and are forecasting a return to previous highs by the first half of 2021.
4. Old Habits Die Hard
Another fear among some investors is missing out on a quicker-than-expected recovery.
The Federal Reserve’s and U.S. government’s moves to buoy the economy have been wide-ranging and so far have elicited confidence among investors. If the stock-market bulls end up being right about a speedy recovery and the economy stages a strong rebound, that would leave other investors left behind a potential stock rally, missing out on gains.
And as has often been the case in recent years, investors find themselves faced with few attractive alternatives if they opt out of betting on stocks. The problem is so familiar it has its own acronym: TINA, or There Is No Alternative to stocks.
“It creates a two-sided risk to this equation for investors,” said Jim Paulsen, chief investment strategist at the Leuthold Group. “It may be the virus continues to burn hot. There’s also a risk on the other side.”
Treasury yields are hovering near record lows and the corporate-bond market has recovered since the Fed introduced its stimulus plan. That means returns on high-grade corporates remain thin as well. Some investors have even started betting on negative interest rates in the U.S.
“Where are you going to put your money to earn a return?” asked Mr. Grant, of KBW. “People are scratching their heads.”
The yield on the 10-year Treasury note settled at 0.679% Friday, while the S&P 500’s dividend yield is about 2%.
5. The Fed’s Backing
Measures by the Fed and U.S. government have underpinned the recent rally across markets. The Fed made it clear it was willing to step in to buoy the economy. Why bet against the market when the central bank is willing to do that?
“You can’t forget the amount of policy that’s under the stock market,” Mr. Paulsen said.
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Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
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