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Has the Dow Jones Lost Its Startling Immunity to Brutal Economic Data?

Last Updated September 23, 2020 1:56 PM
Josiah Wilmoth
Last Updated September 23, 2020 1:56 PM
  • The Dow Jones Industrial Average (DJIA) sold off aggressively after this week’s initial jobless claims release.
  • Stocks rallied off their lows in stunning fashion, but the market is still heading for an ugly weekly loss.
  • Are overly-optimistic investors finally waking up to the reality of a prolonged economic recovery?

The Dow Jones Industrial Average (DJIA) suffered a startling opening bell sell-off on Thursday, diving as 450 points after initial jobless claims once again came in worse than expected.

While the stock market did rally back with a stunning late morning surge, the initial push lower raises an uncomfortable question for Dow Jones bulls. Is the stock market’s immunity to ugly economic data beginning to wear off?

Volatile Dow Plummets, Bounces Off Daily Lows

The Dow swung wildly during the Thursday morning session, starting the day in free-fall before mounting an equally steep recovery.

By 11:08 am ET, the Dow had erased nearly all of its losses. The index last traded at 23,229.56 for a decline of just 18.41 points or 0.08%.

dow jones industrial average, stock market
The Dow Jones rallied aggressively off its lows on Thursday, but the index has a long way to go to avoid recording a steep weekly loss. | Source: Yahoo Finance 

The S&P 500 and Nasdaq reported losses of 0.4% and 0.6%, respectively. All three stock market benchmarks remain on track to record steep weekly losses.

Thursday’s volatility followed the release of another batch of ugly jobless claims data, which revealed that 2.981 million people had filed for unemployment insurance  last week.

That figure was an improvement on the previous week’s ~3.2 million claims, but it still exceeded economist estimates. Worse still, it brought the total number of claims since the coronavirus pandemic struck the U.S. to a stomach-churning 36.5 million.

Is the Labor Market Implosion Finally Weighing on the Dow Jones?

The stock market has been relatively unfazed by the labor market implosion for a simple reason. It was entirely predictable.

But with jobless claim numbers exceeding economist estimates week after week, the sheer volume of the damage may be weighing on risk appetite.

u.s. jobless claims chart
Jobless claims are trending lower, but the sheer volume of unemployment in the U.S. could give investors a “jolt,” Chris Zaccarelli says. | Source: Trading Economics 

As Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, explained in a comment shared with CCN.com.

The stock market has given the bad economic data a pass ever since the Federal Reserve and Federal government stepped in with massive amounts of stimulus in March, but the tide seems to be turning and markets could take another leg lower as the headline numbers continue to jolt investors.

Analysts say it’s a positive sign that new claims are slowing – and have been trending lower for six straight weeks – but it’s not easy to maintain an optimistic outlook when the “good news” is that “only” 3 million people filed unemployment claims last week.

jobless claims and unemployment compared to great recession financial crisis
Source: Twitter 

And it’s even harder to be bullish when you consider that nearly as many Americans have been laid off during the last two months as during the entirety of the 18-month-long Great Recession.

The Stock Market Is Not the Economy – But Many Investors Don’t Know  That

The Dow may have surged off its lows on Thursday, but the index’s overall mid-May downturn could reflect a shift in investor optimism about the economic recovery.

The stock market is not the economy, but mom-and-pop investors don’t always realize that. And the data show that most Americans haven’t been heeding warnings  that the U.S. economy could take years to recover back to pre-pandemic levels.

JPMorgan’s “recovery risk” model estimates that there’s just a 20% chance that the economy enters a new expansion within the next three months. But the S&P 500 has priced in an 83% probability that the economy will achieve that feat.

sock market vs. economy
Source: Twitter 

This stunning divergence was reflected in the Fed’s latest consumer expectations survey, which found that Americans were more significantly bullish on the stock market in April than they had ever been since the bank introduced the survey seven years ago.

americans expect the stock market to increase over the next 12 months.
American consumers were incredibly bullish on the stock market in April. But is that still true today? | Source: Federal Reserve 

It will be telling to see whether those levels hold when the May results arrive.

Disclaimer: The opinions in this article do not represent investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.