State Street Global Markets: The stark divergence between main street fundaments and equity performance

Noel Dixon, macro strategist at State Street Global Markets looks at the stark divergence between main street fundaments and the performance of equity markets.

“As US unemployment hit a post-war high of 14.7 percent in April, the S&P 500 returned to levels it saw back in August 2019, when US unemployment was near a record low of 3.7 percent. The most likely reason for this market resilience is central bank liquidity, which is forcing investors out on the risk curve. As evident in the first chart, and excluding China, who was first in and first out of lockdown, the performance of each stock market is consistent with the degree of monetary stimulus provided. In other words, the US outperformed the other markets (chart 1) as the Fed provided the most stimulus,” Noel Dixon says.

Liquidity transcends fundamentals – chart 1

Source: Bloomberg, State Street Global Markets

He adds: “Investors are understandably hopeful in central banks’ ability to turn things around. Since 1998, the net number of global central bank rate cuts leads global Purchasing Managers’ Index (PMI) by eight months (chart 2). Overall, we expect equity markets to remain resilient over the next six months to a year with the US outperforming among the developed countries.

Liquidity transcends fundamentals – chart 2

Source: Bloomberg, State Street Global Markets