Unemployment claims in the US have continued to break record highs, but that hasn't stopped stock markets from rallying.
Indeed, stocks are climbing following unprecedented market actions by the Federal Reserve to bolster the cash flows via unlimited money printing. Over the past 24 hours, the cryptocurrency market also surged by a collective $10 billion in market capitalisation as bitcoin jumped to new local highs with a much-welcomed 10 per cent move to the upside.
Why is this happening?
The US Department of Labour published its weekly report on unemployment claims, just like in prior weeks, showing that more Americans are filing for unemployment in the millions. For the week ending on April 18, 4.4 million more Americans filed for unemployment benefits. This is down from 5.2 million last week and 6.6 million for the first week of April, suggesting that the rallies are taking place on figures of lower claims but not of an actual recovery.
Year on year, overall claims for unemployment benefits have jumped from 1.7 million to 12.5 million – a 635 per cent increase. Meanwhile, major indices in the stock market closed in the green last week, with the S&P 500 closing upwards of five per cent, and maintaining valuations above the 2,800 range this week. Oil also saw a relief rally this week, posting positive after the catastrophe that was Black Monday. At the same time, bitcoin has closely followed the S&P in lockstep, which has led some analysts to believe that a crash in stocks would signal a parallel crash in the cryptocurrency markets pending a decoupling event.
The stock market’s rally came after an infusion of cash across multiple sectors of both financial and economic markets from the Cares Act. This week, the US Congress just pushed through an additional $480 billion to provide more money to the Paycheck Protection Program (PPP) for small businesses after its initial $350 million in funding ran out of money. This money adds to the trillions which have already been spent as economies attempt to emerge from quarantine.
Why is the stock market climbing when things look bleak?
Commenting on the Los Angeles Times column, business journalist Michale Hiltzik chalked it up to expectations that the Fed will continue to “take care of things” as the gravity of the situation becomes clearer. He wrote: “The unemployment filings removed all uncertainty that the economy is in for a rough few weeks or months. The market in the aggregate takes that as a positive because it’s likely to inspire ever more aggressive stimulus by Congress and the Federal Reserve, which already have pumped trillions into the economy.”
The columnist also believes that Wall Street is pricing in the pandemic lock-down as something that will be short-lived, and they’ve diagnosed the economic downturn around it as a result of the pandemic. Once the disease is gone, then things should go back to normal, he argued.
At the same time, however, other commentators have taken a different perspective, arguing that current market activity is proof that the market is completely decoupled from reality. To this tune, they wrote on Monday: ""Has Wall Street gone crazy? The S&P just wrapped up its best week since 1974 (markets are closed today for Good Friday). We also learned this week that the COVID-19 virus has wiped out 17 million jobs in just three weeks, 10 per cent of the entire America workforce.”
Where is bitcoin in all this?
As per our recent newsletter crypto briefing, much of bitcoin’s price-action is currently dependant on movements in legacy financial markets until proven otherwise. Briefly, bitcoin appears to be moving in lock-step with the stock market and various other indices, which doesn't make much sense given that bitcoin is neither a stock nor is it a heavy physical commodity. That said, the market can remain irrational longer than you can remain solvent, so it might take a while for reality to hit home.
That said, the turning point might come sooner than expected. A recent economic outlook report by Bloomberg posited that bitcoin is transitioning to digital gold, with a possible 2017-style bull run being in the works. The report is bullishly titled the Bitcoin Maturation Leap, which has been making the rounds on Twitter and social media as hopes of a decoupling event become more widespread. Unfortunately, the same cannot realistically be said for stocks as yet given the simple fact that company productivity has seen a dramatic downturn relative to previous quarters.
Christopher Attard is the founder of www.chrisoncrypto.com.