- 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 quartera 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.
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:
Youve got this triple whammy coming through. One is the fear factor from Covid-19 on the rise and how that changes peoples behavior. Secondly, youve got unemployment rising because states are reversing course on their reopenings. And then, third, youve 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 Consults 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.
Im not talking about luxuries and going on vacation. Your car payment is still your car payment. Thats not adjustable. Theres 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 doesnt look promising.
Wells Fargo chief economist Jay Bryson says:
If the labor market really stalls here, thats going to have some significant implications obviously for real personal consumption later this year, particularly if you couple in the fact that peoples 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 Feds optimistic policies will offset wavering investor sentiment. Investors are seemingly anticipating for the New York Feds 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 Capitals 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.
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Samburaj Das edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.