- The coronavirus pandemic has plunged the world into a severe recession. Job losses are unprecedented.
- Bad economic numbers haven’t stopped the Dow Jones from soaring.
- Investors are optimistic and expect a V-shaped recovery.
The Labor Department reported on Friday the worst job losses since the Great Depression. But the Dow Jones continued to rally.
The pandemic and the efforts to contain it have erased at least 21.4 million jobs in the United States in just two months, including a record loss of 20.5 million jobs in April alone. The unemployment rate jumped to 14.7% in April.
The world is plunging into a deep recession after economies worldwide shut down to slow the spread of the coronavirus.
So why has the Dow — which was down by about 35% on March 23 from February high — rebounded by 30% despite awful economic numbers?
The Dow Is Forward-Looking
The stock market is not the economy. It is forward-looking. The Dow and other stock market indices are leading indicators of what’s going to happen in the economy.
The stock market will always predict a recovery before economic data shows it because investors set prices based on what they expect to happen, not on what is actually going on. Bear markets usually end about three to six months before recessions.
The Dow has rallied because investors think things will get better in three to six months. They believe the worst is over.
Jason Brady, CEO of Thornburg Investment Management, sums up the disconnect between negative news and the stock market rally:
If prices try to take into account the end of the world, and the end of the world is slightly less likely to happen, equities can rise.
When things are bad, even a small improvement can make investors willing to buy. Stocks start…