By He Jun*
On March 26, the U.S. Department of Labor has announced that there was a total of 3.283 million unemployment applications as of March 21, far exceeding the figure of 1.70 million that was forecasted and certainly overshadowing the figure of 281,000 from a week back. For the first time ever in America’s history, the number of unemployment figures has reached millions, trumping that of 695,000 during the 1982 recession and 667,000 of the 2008 world financial crisis. Despite jarring numbers, the American stock market remains unmoved and has continued to rise in pricing following its opening on the 26th. The Dow Jones Industrial Average once soared to 1200 points, fluctuating by 5.67%. Stock prices are rising, but so are unemployment rates, so how can one possibly explain this usually-conflicting-but-currently-contradictory phenomenon? And how do we assess the blow that is has on the American economy?
Employing basic research tracking methods, our researchers here at ANBOUND have gathered a conglomerate of opinions following a series of discussions and collaborated analysis with various countries to offer our views and take on the situation as per below. Let’s see what we make of the rise in American stock prices in the wake of high unemployment rates.
For starters, ANBOUND’s researchers examined the logic behind the reciprocal relationship. How could the American stock market fluctuate heavily despite 3, 4 million people losing their jobs? Looking at the state of the market following its opening, the researchers found that the market was placed in a state of holding, which caused its values to rise abnormally. The fluctuation, along with many other incidents have led fellow American investors to dub the event as the Federal Reserve’s morning show.
Meanwhile, the trend in commodity trading showed an inverse relationship with the Dow Jones Industrial Average. Gold prices are still rising, though the same can’t be said for silvers, oil and the Baltic Exchange Dry Index. On another note, the 10-year treasury yield have shown some form of movement. Simply put, these happenings are pointing towards a holding in the market and we won’t be able to see how the market truly fairs until much later.
Ex-Federal Reserve Chairman Ben Bernanke believes America will experience a rapid slump in its economy, though it will be quick to rebound, which brings us to the next question. How should we take Bernanke’s words?
During Bernanke’s speech on March 25, ANBOUND’s researchers noted the chairman’s statement that America’s economy will go through a brief but violent decline during the second quarter, courtesy of the pandemic. He maintained that so long as the economic slowdown does not affect manpower and businesses significantly, the country’s hope to recover from the ordeal soonest will not be dashed. Bernanke also went on to reassure that the economy will not experience a long-term downturn like the one from the Great Recession, nor will it lead to the Great Depression either.
Clearly, Bernanke remains optimistic in America’s economic outlook. He thinks that the decline will take place during the second quarter, followed by a comeback in the third. Essentially, what Bernanke is saying is the economy will see a V-shaped recovery. Our researchers, however, believe his views are flawed. Firstly, Bernanke is getting ahead of himself in his views on America’s economy. In fact, with the power and influences he holds, he could easily mislead the many parties that are involved in the market. As the former chairman of the Federal Reserve, Bernanke should instead, be the organization’s voice of truth.
The way we see it, America’s odds of a V-shaped recovery is little to zero. The fundamentals of the economy differ from that of the capital market and thus, cannot rely on capital injection to improve things. In order to assess the state of the American economy, one must look at the bigger picture instead of scrutinizing one aspect of things only. The same could be said for the global market, which relies on markets around the world to function effectively and not just the American market alone. Our take on America’s current situation is simple – America can’t and won’t be able to resolve its problems within a quarter, and the blow that its economy has suffered will not dissolve anytime soon.
So when exactly does ANBOUND believe the effects of the pandemic will kick in America’s economy?
Time length-wise, as previously mentioned, we believe that America will take up till May to contain the pandemic effectively, though other countries may require a longer time to do so. It’s important to understand that the economic recovery won’t just happen with the flick of a finger and it surely won’t kick in the very second the pandemic ends.
In fact, we must stress that the shortcomings slated to happen in the global economy is determined by the country in which the pandemic is curbed last, especially in an era of globalization. At such times, every country’s economy, production and supply chains are all highly interconnected, which is to say economies all around the world will only, truly recover if the pandemic is adequately curbed.
Plus, there’s one more thing America needs to be mindful of, and that is even if the country rolls out the US$ 2 trillion stimulus plan to aid in the country’s economic recovery, whether it can successfully delay the inevitable economic slump will ultimately depend on the time they administer the policy. Based on the country’s announced plans, if the government were to truly keep to their word and see to families and businesses receiving financial aid, all that work would require at least 6 to 10 weeks to be fully realized, another way of saying the plan will only begin to work its magic sometime around June or July.
As such, these factors are guaranteed to delay the timeline in which America is expected to make its economic recovery. At the end of the day, it is expected that effects of the pandemic would be more pronounced in America, given it is far different from China in that the American economy is largely comprised of service and consumer-oriented economy.
*Mr. He Jun takes the roles as Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy.