Why US Economic Indicators Are Driving Global Stock Markets
The Stock Market’s Playing Catch up with the Economy & Investors Don't like It
The global economy is beset with formidable challenges. In March and April 2020, the US recorded 22 million job losses, accelerating the economic slowdown, and exacerbating the prospects of a speedy recovery. By August 2020, an additional 1.371 million jobs were added, just below the forecast figure of 1.4 million jobs.
This served to quell concerns to a degree, but did little to assuage a growing sense of bearish sentiment now racking the markets. Fortunately, the unemployment rate of 8.4% in August is markedly better than the 10.2% recorded in July. Indeed, analysts were anticipating an unemployment rate in the region of 9.8%.
Crunching the Numbers: NFP Data & How to Trade It
As the premier G20 country, the US is in a privileged position. Several key economic indicators weigh heavily on the US economy, and the broader global economy alike. Chief among them are the United States Non-Farm Payrolls figure. In April 2020, this figure dropped to -20,787, before reversing and recording a figure of 2,725 in May, 4,791 in June, 1,734 in July, and 1,371 in August. The sustained posting of ‘low-positive’ numbers bodes well for a lukewarm recovery.
Of the 1.371 million jobs created in August 2020, government accounts for the largest percentage gain in jobs with Non-Farm Payroll employment at 344,000, followed close intow with retail trade at 249,000, and general merchandise stores at 116,000.Global markets eagerly anticipate news of US economic data, since this serves as a bellwether for general economic activity everywhere. While July figures were substantial, smaller-than-anticipated gains in August were nonetheless reason for celebration.
The release of important economic indicators is often met with premeditation. For example, expectations of bullish data vis-à-visNon-Farm Payrolls will result in a move to trade NFP data to the upside. Disappointing data that falls shy of expectations is met with a bearish response in the financial markets.
Indeed, the Dow Jones Industrial Average (DJIA) has steadily been inching higher since the spectacular collapse in March 2020. From lows of around 19,000 to 28,000 in barely 5 months, analysts readily attest to a robust US economic recovery. The markets appear to have caught a speed wobble heading into September, relinquishing a hefty chunk of recent gains in a series of bearish trading sessions.
Assessing the Performance of theDow Jones in 2020
The 50-day moving average of the Dow Jones is hovering around 27,105, while the 200-day moving average of 26,300 underscores just how substantial recent gains have been. Bollinger Bands add an entirely new perspective to the scene with a low of 27,365, a center band of 28,130, and an upper band of 28,894.
Now that the Dow has slipped beneath the upper band, and is firmly wedged between the centre band and the lower band, bearish sentiment has gripped the US financial markets, and this is reflected globally.
Technical traders tend to place emphasis on these indicators, and trade accordingly. Across Europe and the Middle East, the *1-year performance of stock markets is bearish, with the EuroStoxx 50 PR down 3.85%, the Ibex 35 index down 19.82%, the FTSE 100 index down 19.51%, and the CAC 40 index down 8.67%. Of all the major markets in Europe, only the German DAX 30 is in the black.
Economic Data Provides Clues as to Future Direction of the Economy
Despite the rollercoaster performance of equities markets, many traders and investors prefer to hedge their bets with stocks over fixed-interest-bearing bank accounts. From a macro perspective, the numbers certainly don’t read well. The annual GDP growth rate percentage is -9.1%, the unemployment rate is at 8.4%, and the inflation rate is at 1%.
Many investors are nonplussed by the broader indicators though. Stock dividends tend to yield far greater returns than the lowly interest rates in money market funds and savings deposits. The US economy remains far and away the most substantial and significant economy in the world. 80% of output is determined by the services sector and its tech-heavy emphasis. US multinational corporations dominate global trade, comprising 20% + of all companies on the Fortune Global 500.
While agriculture makes up < 2% of US output, the US is a major supplier of food to the rest of the world. The Midwest states of Iowa, Kansas, and Nebraska form what is known as the ‘breadbasket’ of the world. Thanks to a series of unprecedented economic stimuli in 2020, trillions of dollars have flooded the US economy, helping to drive up demand in goods and services. This, in combination with tax cuts, has permitted US enterprise to flourish under the Trump administration.
While fiscal deficits remain a feature of US economic policy, numbers have steadily decreased as a percentage of GDP since the Global Recession of 2009. In terms of the most important global economic indicators, traders and investors tend to focus on GDP (Gross Domestic Product), CPI (Consumer Price Index), employment indicators, PMI manufacturing and PMI services, and central bank decisions.
Viewed in perspective, US economic indicators set the stage for the performance of the global economy.