(C) Reuters. Wall Street Turns a Blind Eye to Catastrophic U.S. Economic Data
(Bloomberg) — Wall Street’s interpretation of economic data has always been a curious thing. There are times when bad reports are bad news and prompt traders to unload stocks, and times when bad is good and sparks furious rallies.
Then there’s now, when bad data seem to mean almost nothing. The figures documenting the coronavirus-induced collapse are so horrific — like 6.6 million new jobless claims last week alone — it’s hard to fathom them.
Moreover, the reports generally look backward — not exactly the kind of information that interests traders as they bid stocks higher day after day. Instead, investors are focused on giant new lending programs from the Federal Reserve, trillions in stimulus from the government and the latest statistics on cases of the virus, which show some signs of leveling off or easing.
This week traders’ eyes also are pointed at company earnings, and the forward guidance that comes with them, to help assess the pace of a rebound. Many are looking ahead optimistically and betting that some form of economic recovery will come into view soon as government officials plot how to allow companies to restart operations.
“After the economy begins to reopen,” said Stephen Stanley, chief economist at Amherst Pierpont Securities, “then there will be data that give insight into the trajectory of the rebound.”
This, of course, could still be several weeks, or even months, away. It all depends on how quickly the pandemic is controlled and testing and treatments are developed.
The extreme bull case says there is no choice but to write off 2020 and focus instead on first signs of the recovery. That assumes, though, there will be a swift rebound in economic activity and little structural damage to the major corporations that make up the S&P 500 Index.
The index plunged by more than a third between Feb. 19 and March 23 amid the spreading crisis, which President Donald Trump declared a national emergency on March 13. Yet stocks in the index have risen by a quarter since Congress enacted a $2.2 trillion relief package and the Federal Reserve pledged $2.3 trillion in lending.
Recovery Signs
“We are getting to the point now where data will not be completely backward-looking,” said Jay Bryson, acting chief economist at Wells Fargo (NYSE:WFC) & Co. “Retail sales data for March will be very important because it will give people a sense of how much retail spending cratered in March due to the lockdowns that began mid-month. Initial claims will continue to be important over the next few weeks to see how bad the labor market really is.”
Wednesday’s report on retail sales is expected to reveal an 8% drop, with some forecasts as low as a 24% plunge.
Still, the economic data that will prove most important to markets are statistics that start to show some signs of recovery, said Jim Paulsen, chief investment strategist at Leuthold Group, who published a report Monday advising clients to look past the rush of awful numbers.
“Is it really useful to figure out whether second quarter real GDP is collapsing at a 25% or 50% annualized pace?” he wrote in his client note. “Is it somehow important for stocks if weekly unemployment claims are 3 million, 6 million, or 10 million?”
President Trump and some state leaders are starting to talk about reopening the economy as early as May — though that depends on having the virus under control. New cases in New York appear to have plateaued, though some states continue to see a rise in new infections. Health-care officials warn it’s essential to have the pandemic contained with massive testing available before business restarts — or else risk a resurgence.
What Bloomberg Economists Say
“It is premature to assess characteristics of a rebound when the economy is still accelerating into contraction. The profile of the eventual recovery will be shaped significantly by the speed and magnitude of the decline preceding it. However, some high frequency indicators, which are currently still deteriorating, at some point will turn and signal an eventual recovery.”
— Yelena Shulyatyeva
The economic reports also might matter if they are “surprisingly better-than-expected if the fiscal and monetary stimulus cushions the downside,” said Ed Yardeni, president of Yardeni Research Inc.
“Some data coming from China can be helpful because China is two months ahead of the U.S.,” said Zhiwei Ren, portfolio manager at Penn Mutual Asset Management. “Seeing how China is opening and recovering gives us some idea of what the U.S. economy can look like. China’s recent export and import data was better than expected, and that can be positive for the U.S.”
Of all the reports documenting the decline, weekly unemployment claims give the best picture of how fast the job market is deteriorating — and eventually recovering. In addition, the monthly jobs report — next out on May 8 — will give a clearer picture of the industries most affected.
“It is the most sensitive, timely and accurate indicator of the economy’s performance,” said Mark Zandi, chief economist for Moody’s Analytics, of weekly claims. “It will help gauge the depth of the job losses, when the job market is stabilizing and when it has begun to rebound and where.”
High-Frequency Data
A number of financial companies, including Goldman Sachs Group Inc (NYSE:GS)., Deutsche Bank AG (DE:DBKGn) and Citigroup Inc (NYSE:C)., have published private-sector real-time indicators, looking at restaurant reservations, hotel occupancy, electricity usage and airport traffic via security checkpoints, among other reports.
“The more high-frequency stuff will be more closely watched,” said Mark McCormick (NYSE:MKC), global head of FX strategy at Toronto Dominion Bank, such as trade data from South Korea, traffic congestion, shipping-vessel movements and air quality.
Once parts of the U.S. start to reopen to business, data that suggest the pace — such as business and consumer confidence, and credit defaults and bankruptcies — will be important to watch.
Later this month, there will be the usual flurry of reports on everything from housing to manufacturing and consumer confidence. Investors probably will still ignore most of it.
“Markets will not start reacting to data until it tells us something about how rapidly conditions are normalizing,” said Andrew Hollenhorst, chief U.S. economist at Citigroup. “That means we will be waiting for data from May or June.”
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