The stock market’s runaway train has been derailed by a force nearly as powerful as easy money: a healthy dose of reality.
Wall Street is unprepared for a potential second wave of the pandemic. It would completely undermine the extreme optimism about the economy that had catapulted US stocks towards record highs.
« The rally in the stock market from the March 23 lows was simply overdone, » said David Kelly, chief global market strategist at JPMorgan Funds. « We are still in a very deep recession. We still have a tremendous amount of uncertainty about the virus but also about stimulus and politics. »
But you wouldn’t know that from looking at the markets, which have surged even in the face of mostly-dreadful news about the economy. Boosted by unprecedented stimulus from the Federal Reserve, the S&P 500 surged as much as 44% from the lows. The Nasdaq was up 46% and had already set new highs.
« The market is pricing in a V-shaped recovery. But what you really have is a huge slump, a bump and then a crawl until we get a vaccine, » said Kelly.
‘Mass unemployment’ isn’t going away anytime soon
The surprisingly strong May jobs report, which showed an unexpected surge in hiring, raised hopes for a sharp economic recovery.
But the Labor Department reported Thursday that another 1.5 million Americans filed for first-time unemployment benefits last week. The good news is that initial claims have dropped for 10 weeks in a row. The bad news is that claims are still extremely elevated.
Prior to this crisis, the biggest weekly jobless claims figure was 665,000 during the Great Recession. In other words, claims are still rising at more than twice the prior record pace.
« Mass unemployment is going to be the primary condition that defines the economic narrative going forward, » Joe Brusuelas, chief economist at RSM International, wrote in a report Thursday.
Hospitalizations are up in 12 states
Meanwhile, the coronavirus numbers have deteriorated in recent days, raising fears of a return of the health restrictions that caused mass layoffs in the first place.
