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<\/p>\nDon\u2019t fight the Fed.<\/p>\n
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Published: April 10, 2020 at 10:12 a.m. ET, By Andrea Riquier<\/p>\n
This was the best of weeks, and it was the worst of weeks.<\/p>\n
To start with the \u201cworst:\u201d we learned that 6.6 million more people filed for unemployment<\/a> for the first time, for a three-week tally of more than 16 million and taking the jobless rate up to 10% or more, even as it likely underestimates the number of people who haven\u2019t been able to get through to overburdened state unemployment systems.<\/p>\n The \u201cbest\u201d part may have been just as unsettling. Stocks had their best week in over four decades, with the Dow DJIA up 12.67%, the S&P 500 SPX gaining 12.1%, and the Nasdaq COMP up 10.59%.<\/p>\n In fact, two sectors of the S&P 500 charted their strongest week ever. The chart above shows the sector performances, with data from Dow Jones Market Data. The real estate sector was only launched in 2016; historical data before that is back-tested. All the other sector data dates back to 1989.<\/p>\n What gives?<\/p>\n First, it\u2019s important to note that many strategists think markets haven\u2019t fully grasped the scope of the devastation the coronavirus will wreak on the economy, let alone the human toll. And for now, the unprecedented actions by the Federal Reserve and other central banks are helping keep investors numb.<\/p>\n \u201cStocks are up because the damage to the economy \u2014 evident in claims \u2014 is beyond comprehension, while the response of the Fed is easier to understand,\u201d wrote Chris Low, chief economist for FHN Financial, in a note out Thursday after the jobless claims data.<\/p>\n And most strategists think stocks are likely to take a leg lower from here. Investors haven\u2019t yet had a true \u201ccapitulation,\u201d<\/a> Kim Forrest, founder and CIO of Bokeh Capital Management, told MarketWatch. Analysts at Goldman Sachs agree<\/a>.<\/p>\n Still, there may be some historical context for understanding what\u2019s going on.<\/p>\n In an analysis published Thursday, investor Ned Davis notes that the stock market does better than average when unemployment spikes. Davis\u2019 research shows that a jobless rate over 6% correlates with the stock market rising 13.7% per annum.<\/p>\n \u201cHow can this be?\u201d Davis wrote. \u201cIt defies logic. My explanation would be that this news is widely followed, and the market tends to look ahead. So it is probably priced in.\u201d<\/p>\n It\u2019s also probably in large part because of the central bank\u2019s punchbowl, Davis added. Very high unemployment \u201ccan send the Fed into overdrive in terms of making money cheaper and more easily available\u2026 When the Fed helps investment grade bond yields plunge, it has been a good buy signal for stocks.\u201d<\/p>\n The Fed on Thursday pledged more support for investment grade bonds<\/a>, and some limited support for sub-investment grade debt.<\/p>\n Related: American businesses are tapping their credit lines at the fastest pace ever<\/a><\/p>\n Nicholas Colas, co-founder of investment research shop DataTrek Research, also had some thoughts on the link between the real economy and markets, in an analysis released Friday. \u201cThe issuance of money sits at the intersection of public trust and government responsibility,\u201d Colas wrote.<\/p>\n \u201cIt is tempting to think that the Fed\u2019s actions today means US stock prices will only trend higher from here: When you remove near term bankruptcy risk from every publicly held company regardless of credit rating or near-term financial condition, asset prices should rise,\u201d Colas added. \u201cMarkets know that no matter how bad cash flow might be there is a Fed loan backstop waiting in the wings if needed.\u201d<\/p>\n What\u2019s more, he said, \u201cThe Fed knows it must keep equity markets stable to rising in order to keep the 40% of Americans who own stocks sufficiently liquid and confident to spark a recovery in consumer spending. This is the classic wealth effect, something the Federal Reserve understands well.\u201d<\/p>\n It\u2019s worth pointing out that if 40% of Americans own stocks, 60% do not. And not only are those people not sparking a trickle-down recovery, they may be just trying to keep food on the table<\/a>.<\/p>\n