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Dow Darts Higher – But Will Backbreaking Unemployment Stunt the Rally?

Last Updated September 23, 2020 1:54 PM
Francois Aure
Last Updated September 23, 2020 1:54 PM
  • The Dow Jones enjoyed a triple-digit gain on Tuesday.
  • Wall Street continues to focus on the positives as economic activity comes out of its deep freeze.
  • But ING believes U.S. unemployment could hit 22% in May.

The Dow Jones was off to the races on Tuesday as surprisingly-rosy economic data mixed with swirling optimism about the growing number of states that are winding down their coronavirus lockdowns.

Stocks cut their gains ahead of the closing bell, but surging crude oil prices helped keep the major benchmarks firmly in positive territory.

Dow Jones Rallies as Optimism Reigns On Wall Street

All three of the major U.S. stock market indices  rallied on Tuesday, though they closed the session well off their highs.

dow, djia
The Dow cut its losses in late afternoon trading, but it still raced toward a triple-digit gain. | Source: Yahoo Finance 
  • The Dow gained 133.33 points or 0.56% to rise to 23,883.09.
  • The S&P 500 climbed 0.9% to 2,868.44.
  • The Nasdaq bounced 1.13% to 8,809.12.

After being hit by a historic demand shock, the price of oil went negative last month , but increased economic activity around the world has helped lift WTI back toward the $25 handle.

There is no question that $25 crude is better for the Dow Jones than sub-zero oil. But pricing is still extremely depressed relative to the yearly highs, and there are real fears that oil demand could be in trouble long-term.

As more states look to reopen their economies, even cautious California Governor Gavin Newsom is easing some restrictions . This hints that the bottom may be in for many hard-hit industries.

The tail-risk to this line of thinking remains the ever-present possibility of a second wave of coronavirus, and White House health advisors continue to urge vigilance.

On the economic data front, the U.S. ISM non-manufacturing print gave the Dow a boost. This measure of business activity in the services sector came in stronger than forecast at 41.8 versus 36.8 .

While still showing a marked slowdown from March’s reading above 50, economic statistics have repeatedly underperformed forecasts throughout the pandemic. So this data release put an increasingly-rare green number on Wall Street’s economic calendar.

The final catalyst fuelling the rally in the stock market was Pfizer’s announcement that it was beginning human trials of a possible coronavirus vaccine.  

CNBC’s “Covid-19 Testing & Treatments Index” continues to show a strong correlation between so-called “plague stocks” and the market as a whole.

Stock Market, Dow Jones, CNBC, Coronavirus, COVID-19
CNBC’s index that tracks stocks working on a coroanvirus vaccine continues to move in lock-step with the Dow. | Source:  CNBC 

This suggests that investors remain laser-focused on the development of medical tools to fight the spread of the pandemic.

U.S. Unemployment Is a Serious Threat to the Stock Market

Despite all these positive storylines, the underlying theme in the United States is one of severe economic weakness. Unemployment is sky-high, and there is little debate about the pain this will inflict on Main Street.

Economist James Knightley at ING predicts that the May jobs report is likely to reach an eye-watering unemployment rate of 22% .

He wrote today:

Unemployment is clearly broadening out to other sectors. The plunge in the ISM employment component to the lowest level since June 1949 warns of sharply fewer jobs in this sector while the carnage in the oil and gas industry makes that sector look vulnerable to job losses too. Business services will not be immune.

Consequently, the May report, which will be published June 5th is likely to post a further 10 million unemployed, pushing the unemployment rate up to 22%.

But if Wall Street expects this, you wouldn’t know it from looking at the stock market. The famous “Warren Buffett Indicator” implies that equities are more overvalued today than they were at the start of the year  – when the Dow, Nasdaq, and S&P 500 were all trading near record highs.

Dow Jones, Stock Market, Warren Buffett
The so-called “Buffett Indicator” suggests the stock market is overvalued. | Source: Sven Henrich via Twitter 

Dow 30 Stocks: Heavyweights Carry The Index

On a solid day for the Dow 30 , its most heavily weighted stocks shined brightly. Apple and UnitedHealth Group both propelled the market higher with gains surpassing 1.5%.

Adding to the upbeat mood, $1 trillion tech giant Microsoft posted a strong rally of its own. The tech sector continues to prove remarkably resilient to economic headwinds.

Pfizer rallied more than 2% after its coronavirus vaccine announcement, while rival Johnson & Johnson was up just under 1%.

Continuing its rough stretch, Boeing was the worst-performing stock in the Dow Jones with a 4.6% decline. Disney was close behind with a 2% loss ahead of its earnings call .