Why Has the Market Disconnected from the Pandemic?

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Jun 30, 2020 3:39:57 PM

and tagged Commentary

Leave a comment

marketRight now, we seem to be seeing a disconnect between the rising case counts and the rising stock market. Yes, there was a bit of a pullback on the news that case growth was hitting a new high. But since then, the markets have started to bounce again, even as case counts continue to increase. I get many questions about this disconnect. Indeed, on the surface, it seems to make no sense. What is going on here?

Back to normality?

The first takeaway is that the market has now disconnected from the coronavirus pandemic. Earlier, what seemed to matter was the virus. As case counts rose and fell, the market responded—and that made sense. Then a disconnect came, where the market started to rise again even as cases went up. But lo and behold, then cases started to come down again.

The next disconnect was that the market kept going up even as the layoffs, business closings, and economic damage continued to mount. Then, as the virus came under control and the economy reopened, the economy started to come back faster than anyone expected.

In both cases, the market led the news. But the reason for that is that the market was anticipating economic improvement, not changes in the pandemic. This is, in fact, what the market should be doing: recognizing economic changes and reflecting them. The fact that this is what’s now happening is good news and represents another approach to normality.

Is the market right?

What we can take from this shift is that, despite the rising case counts, the market still expects the reopening to continue and the economy to continue to normalize. In fact, the market now expects the economy to be back to 2019 levels by next year, based on the expected corporate earnings levels. That would be a remarkable recovery if it happens. Will it? And how can we know? To answer those questions, there are two things we need to focus on: jobs and confidence.

As you may know, consumer spending is more than two-thirds of the economy, but most of the rest also depends on consumers. Government spending, at the state and local level, depends on tax receipts, which depend on jobs. Similarly, business investment depends on companies’ sales, which tie back to (you guessed it) consumer spending. In a very real sense, consumer spending is almost all of the economy. And consumer spending depends on jobs and confidence.

We can’t just look at the levels, either. Recent headlines correctly point out that the U.S. economy is down by tens of millions of jobs. The headlines could also point out that consumer confidence is down by record-setting amounts from the high. Neither has any more meaning, however, than saying three months ago there were tens of millions more jobs and consumer confidence was much higher. It tells us nothing about the future. What matters are trends.

What’s trending?

Are jobs improving—and how fast? Is confidence rising—and how fast? And how are those trends translating into spending? Is it up or down, and by how much? These trends are what tell us about the future.

In fact, employment is improving significantly. Consumer confidence has bounced significantly. And consumer spending in many categories (housing, autos, even restaurants) has improved significantly. With these trends in place, the economy remains on track for recovery. And the market, which looks at the economics, is reflecting that. There really is no disconnect between the market and current conditions. The market is simply looking at different things than the headlines do.

Don’t watch the headlines

This also shows us what we need to watch. Will the trends in jobs change? Will confidence start to decline? Not yet, certainly, but that is what could turn the market back into a downtrend.

If you want to understand the financial markets, don’t watch the headlines. Watch the economic stats, especially jobs and consumer confidence. These are the two factors that really predict where the economy and the markets are heading.

Upcoming Appearances

Tune into NASDAQ's Trade Talks on Tuesday, July 7, at 2:00 P.M. ET to hear Brad talk about the mid-year outlook. Watch at https://www.nasdaq.com/news-and-insights/tradetalks

Subscribe via E-mail

Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®