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Unemployment Data Alarm Turns Stock Investors Toward U.S. Treasuries

Last Updated September 23, 2020 2:10 PM
Joseph Young
Last Updated September 23, 2020 2:10 PM
  • Economists feared worsening unemployment data could cause the economy to further decline.
  • Ahead of the release of new economic data, a growing number of investors are flocking to U.S. treasuries.
  • “Massive” liquidity is a variable that could offset gloomy economic trends in the medium-term.

Ahead of the release of new unemployment data, U.S. treasury yields have fallen.  Stock market investors appear to be seeking safety in the short-term.

Economists and strategists anticipated a sharp downturn in U.S. GDP. The economy contracted 32.9% annually in the second quarter—a figure that surprised very few. 

But the abrupt increase in jobless claims has investors worried. 

There are concerns that consumer spending could decline, leading to a worsening economic downtrend. Such a gloomy trend could eventually cause a stock market slump.

stock market
The U.S. stock market continues its uptrend after a 1.39% gain. | Source: Yahoo Finance

Real Risk in the Stock Market if Unemployment Rate is High

On August 6, Dallas Fed President Robert Kaplan is scheduled to provide a speech. The speech will be followed up with Q2 household debt and credit report.

The new economic data and jobless claims  could set the sentiment around the stock market for the near-term.

The U.S. stock market has rallied in recent months with strong performances from Big Tech.

If unemployment data is higher than the expectations of investors, economists say it could trigger a storm of negative factors.

Video: The jobs-recovery train is losing steam

ING Financial Markets’ chief economist James Knightley warned a “triple whammy” of pessimistic factors  is incoming. He said:

You’ve got this triple whammy coming through. One is the fear factor from Covid-19 on the rise and how that changes people’s behavior. Secondly, you’ve got unemployment rising because states are reversing course on their reopenings. And then, third, you’ve got the income squeeze.

The income squeeze of millions of Americans, which Knightley pinpointed, is getting worse.

New reports show six million U.S. citizens are unable to pay their bills.

Morning Consult’s chief economist John Leer said people are not able to pay rent and basic necessities.  The concerning trend could slow down the stock market, especially considering that it has been primarily retail-driven.

Leer said:

I’m not talking about luxuries and going on vacation. Your car payment is still your car payment. That’s not adjustable. There’s a real risk of rising delinquencies.

The Economy is Getting Worse, and Investors are Preparing For It

As the economy declines , incomes stagnate and joblessness rises, the outlook on equities doesn’t look promising.

Wells Fargo chief economist Jay Bryson says:

If the labor market really stalls here, that’s going to have some significant implications obviously for real personal consumption later this year, particularly if you couple in the fact that people’s unemployment benefits.

The multi-trillion-dollar stimulus package, record-low interest rate, and relaxed market conditions are buoying the stock market.

Video: Central Banks Maintain Favorable Market Conditions, Sustaining Stock Market Momentum

Yet, economists and investors are turning cautious toward the near-term trajectory of the economy.  

It remains unclear whether the Fed’s optimistic policies will offset wavering investor sentiment. Investors are seemingly anticipating for the New York Fed’s credit and household debt report to analyze near-term market sentiment.

A variable that could fuel newfound appetite for the stock market in the medium-term is global liquidity.

DTAP Capital’s Dan Tepiero says “massive” global liquidity will hit the markets  in 2021. He said:

Massive global liquidity to hit markets NEXT year. Chart suggests equity market at risk of correction in Q4, then single greatest rally of our lifetime in 2021. Enormous speed and near vertical price increase possible.

The trend of global liquidity. | Source: Nordea, Macrobond, Dan Tepiero 

The U.S. stock market has rallied off of liquidity and favorable market conditions in recent months.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author holds no investment position in the above-mentioned securities.