Morning Jog

Direction

The disconnect between the front page headlines and the markets section, was on striking display this week as the protests following the reprehensible killing of George Floyd continued to sweep the country.  Amid a pandemic and a self-imposed economic recession, our nation certainly didn’t need a national crisis.  We didn’t need burning police cars, destruction of property, tear gas, rubber bullets or the National Guard on our streets.  But this crisis was in the making for decades. The pandemic’s disproportionate toll on minority and low-income communities shined a light on the persistent inequalities in the healthcare and the labor markets.  And, if people taking to the streets to gather peacefully to exercise their First Amendment rights, is what it takes to spark policy action to address institutional discrimination and inequalities in the legal system, then this moment is exactly what we needed. Seeing protests across all 50 states, big cities and small towns, gives me hope that we may finally be at a tipping point to change direction.

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Any other time, news of a 13% unemployment rate would be considered devastating. But this is not “any other time.” And, when economists were calling for the jobless rate to jump to 20%, a decline in this number is clearly a cause for celebration – which the markets did with a 3% up-move on the news.

The latest move comes on the heels of the largest 50-day rally in S&P’s modern history, recovering most of the year’s loss.  The Nasdaq 100 index is at an all-time high and even the Russell 2000 (an index of small companies, 40% of which have negative earnings) is down only 10% for the year.

Crashing corporate earnings and high unemployment only highlight the dissonance between the economic data and the market. But for the markets, it is the direction that matters, not the present.  Swift Central Bank and fiscal policy response stabilized the financial markets in April, and we are now seeing early signs of stabilization in the real economy as well.  The NY Fed’s weekly gauge of high-frequency consumer, production, and labor activity corroborates this view:



We are no longer heading into the abyss, with no bottom in sight. Granted, without a permanent solution to the health crisis, and the possibility of a second infection wave, the climb out will be slow. But, if the rebound in hiring seen in May is sustained along with continuing fiscal and monetary policy support, the market—and not the economists, may be right about the shape of the recovery.

Enjoy your weekend.
Alex