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Perspective Within the Chaos: Unemployment, Government Intervention, and Market Technicals

Unemployment claims

Another 6,600,000 filed for unemployment benefits on April 8th, which brings the total claims in the past three weeks to almost 17,000,000. That figure could be “a third higher” due to both an overwhelmed system that likely hasn’t fulfilled all applications and also some not filing claims. If true, the unemployment rate could be between 15-20% today. Interesting note: the Great Recession saw 10% unemployment for only one month in October of 2010.

Government stimulus

In mid-March the FOMC made an emergency cut of the fed funds rate to zero, which effectively injects liquidity into the market by allowing the banking system to borrow for free. Immediately impacted for the better were the money market, commercial paper and repo markets.

The Treasury followed suit and implemented an emergency relief bill totaling an estimated $2.2 trillion ($2,200,000,000,000) to provide immediate relief to individuals, small business, the healthcare system and large corporations. The infographic below provides more detail about how the package is being deployed

source: Yesterday it was revealed that the House is working to pass another $500 billion ($500,000,000,000) to boost unemployment pay by an additional $600 on average per month. On Thursday April 9, the Fed announced yet another injection of $2.2 trillion ($2,200,000,000,000) targeting business and state governments. Stock futures were higher before the open. With how rapidly these economic fundamentals are deteriorating and the extraordinary measures being implemented why is it that stocks are up 25 percent in two weeks? It’s partly because there’s expectations that the rate of infection is slowing quicker than previously thought but also because of the belief that the stimulus measures are sufficient. There’s a third reason, however, that’s based on empirical evidence: history shows that the faster a selloff along with its severity, comes a short term “dead cat bounce” that provides weak indication for the longer term trend going forward. The following graph shows this phenomenon before, during and after the recession of 2001

As the graph shows, each sudden decline was followed with almost a mirrored buying response yet the bear market persisted for almost three years.

Some major financial institutions, like Morgan Stanley, State Street and Jefferies – along with people I’ve spoken to -- believe that we’re experiencing a short term bounce that will be followed with a retesting of new lows. However, because this correction wasn’t borne from systematic fundamental factors the argument could be made that once the preventative measures of sheltering in place are lifted, things wil get back to normal. At what rate seems to be the bet investors are wagering on.


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