Stocks resume rally, despite miserable data

3 mins read

By Hussein Sayed, Chief Market Strategist at FXTM

Investors in Asia kicked off the week in an upbeat mood, with most major equity indices trading in positive territory. The upside momentum seems to be a continuation from Friday’s Wall Street session which saw the S&P 500 adding 1.7% and the Nasdaq Composite erasing all losses for the year following a 37.5% rally from its March trough.

Charts of US major indices are already reflecting a V-shaped recovery with the Nasdaq Composite only 7.9% short of its record high and the S&P 500 15.8% below its peak.

For many investors, the divergence between Wall Street and Main Street does not make a lot of sense, especially as it seems to be widening. No figures in history match Friday’s non-farm payrolls (NFP) report, which showed a record 20.5 million jobs losses for April and unemployment reaching 14.7%. According to US Treasury Secretary Steven Mnuchin, the unemployment rate may now be closer to 25%.

While we all know that financial markets are forward-looking and much support has been received from monetary and fiscal policies, what we are experiencing now is investors falling into a behavioral bias known as ‘Narrative Fallacy’.

Narrative fallacy limits our ability to evaluate information objectively, hence we make irrational decisions. Humans can easily fall into this bias as we love stories, and the great story right now is economies are gradually restarting with lockdowns being lifted.

While we all hope that we swiftly return to pre-Covid19 economic activity, the facts will most likely prove us wrong. We are starting from an incredibly low activity base.

Tens or possibly hundreds of millions of jobs are already lost around the world, and many will not return in a matter of months. Even for those who are still on payrolls, there is a high likelihood of elevated levels of savings curbing demand. That is still not taking into consideration a second coronavirus wave that could lead to new lockdowns, if no proper treatment or vaccine is discovered yet.

How long risk assets supported by unconventional policies can defy the real economy remains an open question. But from where valuations stand, it seems a lot of the good news is already priced in, and the best-case scenario is to see some sort of consolidation around current levels.

Until confidence returns to the real economy, the rally in risk assets will not be sustainable and investors will need to reconsider their positions at some point soon.


For information, disclaimer and risk warning visit FXTM

FXTM Brand: ForexTime Limited is regulated by CySEC and licensed by the SA FSCA. Forextime UK Limited is authorised and regulated by the FCA, and Exinity Limited is regulated by the Financial Services Commission of Mauritius