Why the Dow is Shrugging off the Worst Ever Unemployment Numbers

Just minutes before the opening bell on Friday, news of the worst unemployment numbers since the Depression Era, flashed across the screens. The stock market bulls took the news in stride; they did not so much as blink an eye. Unemployment is up by 14.7 percent. The Dow Jones Industrial Average is up as well. The Dow gained more than 300 points to close the week.

On January 1, 2020, U.S. unemployment was at a five year low. Five months later, unemployment stands at its worst mark since the Great Depression. James Sweeney, Chief Economist for Credit Suisse, summed up the situation in one sentence, “This might be the worst macroeconomic report in the history of the United States.” Yet, the stock market reacted with little more than a shrug.

What is Driving the Market?

Although faced with grim economic news, equity markets closed on Friday, showing the best gains in a month. Friday’s report showed that over 20 million jobs were shed last month. During the same period, unemployment rocketed from a 50-year low of 3.5 percent to over 14 percent, with no end in sight. Although 20 million unemployed is disastrous, it is better than some estimates that ran as high as 22 million.

Chris Zaccarelli, Chief Investment Officer of Independent Advisor Alliance, wrote, “The magnitude of job losses cannot be contained. The number of lost jobs, as well as the rate of unemployment, is likely to exceed those seen during the Great Depression.”

Amid evidence that there is progress toward the reopening of the economy in the U.S. and elsewhere, the equities market is discounting the current economic weakness. Washington is providing an economic stimulus, and the Federal Reserve Bank has taken unprecedented actions to save the economy. Zaccarelli went on to say that thanks to the positive moves made by the Fed and Washington, it is unlikely that the world will face another Great Depression.

Investors are also taking into account the fact that employers classify some 18 million of the 20.5 million jobs that have been lost as temporary in nature.

Mr. Shawn Cruz, trading strategy manager at TD Ameritrade, believes markets are trying to price in the speed at which the economy returns to normal. With such an overwhelmingly high number of lost jobs classified as temporary, it increases confidence that these people will be rehired.

U.S.-China Co-operation

As well as a reopening of the economy, market sentiment was boosted by the news that Robert Lighthizer, U.S. Trade Negotiator, his Chinese counterpart Liu He, and U.S. Treasury Secretary Steven Mnuchin spoke last Thursday. The conversation resulted in the U.S. and China, the two largest economies in the world, agreeing to strengthen cooperation in the areas of public health and macroeconomics. The report of this conversation indicates a softening of hostilities between the two countries after President Trump accused Beijing of mishandling the COVID-19 outbreak. President Trump also threatened to annul a bilateral trade pact entered into by nations.

Investors are keeping one eye on U.S.-China trade talks and the other eye on the U.S. economy in the aftermath of the coronavirus pandemic.