Now that the third month of the current economic crisis is about to end, some equity indices have so far experienced a V-shape recovery. Nasdaq in the United States is back in green territory year-to-date as investors’ bid for tech equities continues. The recent boost in German Zew economic expectations highlights one important correlation that existed before the crisis – equities are tightly correlated to surprise indices.
So far, in 2020, despite the recession, the correlation remains in place. If we look back throughout history, it is not the first time when equities rose during recessions. It is only that because investors nowadays have access to plenty of information, we want to know why equities rise – economic surprise indices are one explanation.
Consumer and Business Confidence is Key
Before the 2020 crisis, consumer confidence indicators were one of the most underrated indicators released in the developed world. While traders and investors usually focus on inflation and job data, consumer confidence data like the University of Michigan Consumer Confidence was always considered second tier. In fact, it has similar importance and effect in sending stock prices higher or lower, and this became obvious in these times of crisis.
Everyone is aware of the current high unemployment rates in the development world. Moreover, everyone agrees that more people will lose jobs in the months to come. Maybe, the entire 2020 is compromised from an economic point of view – as is 2021.
Yet, if the confidence levels remain elevated, policymakers can build on it, and the wealth effect created by the stock market will eventually spill over into the economy. It inevitably stimulates consumption.
Consumers and Investors See Their Backs Supported
A distinctive characteristic of this crisis when compared with previous ones, is that consumers and investors feel they are not alone. Governments and central bankers injected massive liquidity into the system, going as far as offering loans at negative rates, forgiving tax collection, or delivering “helicopter” (i.e., free) money directly into bank accounts. In Vienna, Austria, each household received EUR50 in a bank account to go out and spend it at a restaurant of its choice. Translation – it is easy to be optimistic, despite the negative economic highlights.
The EU Rescue Fund announced at the start of this trading week is another step in the same direction. If approved, it could benefit from favorable funding costs – providing liquidity to the European economies that suffered the most.
Economic surprise indices ultimately reflect consumers’ and businesses’ confidence in the future. In times of need, like in a crisis, confidence is a much-needed asset.