WSJ
Last week saw an increasingly discordant relationship between bleak economic data and ever-rising stock market gains, leaving many scratching their heads. The Dow extended its rally, showing a 15% gain in two weeks, its best performance since 1938, while another 5.245 million Americans filed for unemployment in the week ending April 11, bringing the total number to over 22 million.
The optimism is due to the government doing whatever it takes to prop up the economy, namely through the implementation of its $2.2 trillion stimulus package and purchasing of Treasury and mortgage-backed securities, and the assumption that the current economic restrictions are temporary and that business will pick up where it started pre-coronavirus. This, coupled with rumors that Gilead Science’s drug Remdesivir is doing well in clinical trials is helping boost confidence that an effective treatment for covid-19 will be available sooner rather than later, although the soundness of the results of the studies is still up for debate.
Despite the stock market gains, there are signs elsewhere in financial markets indicating not everyone is sold on a speedy recovery. The yields on 10-yr Treasuries are still far below their mid-March levels, 0.655% compared to 1.26%, and gold has pushed towards its recent highs of $1,700 per ounce.
States have begun considering easing stay-at-home restrictions and re-opening certain businesses gradually. Although on the surface this may bode well for the economy, it still feels as though we may be jumping the gun as covid cases continue to climb and testing capacity remains limited, potentially setting the stage for additional waves of coronavirus outbreaks. If we take the necessary precautions- continue social distancing, wearing masks, and limiting contact with groups who are more “at-risk”- then we may gradually get “back to normal” but I certainly don’t think it will be a v-shaped recovery some are suggesting or as the stock market rally is implying (how many people are going to rush back to bars, restaurants movie theaters and cruises without an effective covid treatment in existence?).
Since it seems economic data doesn’t seem to phase equity prices, some things to keep an eye out for in the week ahead include covid case number updates, the latest results on the various covid treatment studies out there, and also signs for additional stimulus, including additional funding for the Small-Business Aid program, which ran out of money in two weeks.