--- title: "Thinking Ahead: Making Sense of the Disconnect between Markets and the Economy" description: Markets are naturally full of surprises. With such a powerful disruption across the globe, how can the rebound in financial assets fit with economic reality? image: https://blog.wavelengthcapital.com/hubfs/The%20Perspective%20-%20By%20Andrew%20Dassori-3.jpg --- [![Wavelength Insights & Ideas](https://blog.wavelengthcapital.com/hs-fs/hubfs/WavelengthCM_Logo_Horizontal_Blue.jpg?width=4200&height=400&name=WavelengthCM_Logo_Horizontal_Blue.jpg "Wavelength Insights & Ideas")](https://wavelengthcapital.webflow.io/research-insights) Open main menu Close main menu [Factor Investing](https://blog.wavelengthcapital.com/tag/factor-investing) [Fixed Income](https://blog.wavelengthcapital.com/tag/fixed-income) [Interest Rates](https://blog.wavelengthcapital.com/tag/interest-rates) [Mutual Funds](https://blog.wavelengthcapital.com/tag/mutual-funds) [Inflation](https://blog.wavelengthcapital.com/tag/inflation) [Wavelength Insights](https://blog.wavelengthcapital.com/tag/wavelength-insights) [Artificial Intelligence](https://blog.wavelengthcapital.com/tag/artificial-intelligence) # Thinking Ahead: Making Sense of the Disconnect between Markets and the Economy ![Andrew Dassori, Chief Investment Officer](https://blog.wavelengthcapital.com/hs-fs/hubfs/Andrew%20Dassori%20Headshot.jpg?width=45&name=Andrew%20Dassori%20Headshot.jpg) [Andrew Dassori, Chief Investment Officer](https://blog.wavelengthcapital.com/author/andrew-dassori) [Share this blog post on Twitter](https://twitter.com/intent/tweet?text=I+found+this+interesting+blog+post&url=https://blog.wavelengthcapital.com/making-sense-of-the-disconnect-between-markets-and-the-economy) [Share this blog post on Facebook](http://www.facebook.com/share.php?u=https://blog.wavelengthcapital.com/making-sense-of-the-disconnect-between-markets-and-the-economy) [Share this blog post on LinkedIn](http://www.linkedin.com/shareArticle?mini=true&url=https://blog.wavelengthcapital.com/making-sense-of-the-disconnect-between-markets-and-the-economy) ![](https://blog.wavelengthcapital.com/hubfs/The%20Perspective%20-%20By%20Andrew%20Dassori-3.jpg) On May 8th, the Bureau of Labor Statistics released its monthly data on the US unemployment rate which jumped from 4.4% to 14.7%, the highest level since the Great Depression. That same day, the S&P 500 Index was up +1.7% after rising +12.8% in April, the month the data covered. **Figure 1: US Unemployment Rate vs. Long-term Average ![US Employment Rate vs. Long-term Average](https://blog.wavelengthcapital.com/hs-fs/hubfs/US%20Employment%20Rate%20vs.%20Long-term%20Average.png?width=739&name=US%20Employment%20Rate%20vs.%20Long-term%20Average.png)** Markets are naturally full of surprises, so at face value this is nothing new for investors. But the speed at which stocks approach their pre-crisis highs amidst the sharpest economic downturn of the post-war era has led many to question this trajectory. With such a powerful disruption across the globe, how can the rebound in financial assets fit with economic reality? There are no clear historical parallels to answer this question – as Federal Reserve Chairman Jay Powell explained in his May 13th speech, “the scope and speed of this downturn are without modern precedent.” But beneath the surface of markets and the economy, both longstanding forces and new dynamics can offer insight into what is happening. **Markets are Looking Ahead (into the Unknown)** Starting with what is familiar, the forward-looking nature of markets has been clear in recent weeks, as people look ahead to a new normal even if they are unsure of what it will be. By investing we are effectively purchasing future cash flows which gives markets the ability to absorb short-term shocks provided there are expectations of an eventual recovery. Investors are thus recognizing the value in those future cash flows versus other investable assets, such as US Treasuries where 30-year yields close in on record lows. While risks have increased substantially due to the pandemic and its economic impact, this is already reflected in asset prices. Markets will recalibrate – as they always do – to a new set of conditions moving forward. **Existing Trends are Accelerating** For companies, the shutdown’s impact has not been uniform, and important differences will flow through to future financial results. Many large firms that make up indices like the S&P 500 have continued to use advantages of scale and greater financial strength to weather this disruption. They are now positioned to gain market share from smaller competitors under pressure. While the pandemic may have hit firms at roughly the same time, it has taken trends that were already in place – like consolidation, e-commerce and the dominance of technology – and accelerated these dynamics as we emerge from the crisis. **The Fed is the Biggest Factor** The phrase “don’t fight the Fed” has been around for decades but continues to grow in importance alongside the size of the central bank’s balance sheet. The institution’s role in markets has evolved due to the limits of traditional monetary policy, and its expanding toolkit is clearly evidenced by large-scale asset purchases reaching unprecedented levels. **Figure 2: Federal Reserve Total Assets (millions of $) ![Federal Reserve Total Assets](https://blog.wavelengthcapital.com/hs-fs/hubfs/Federal%20Reserve%20Total%20Assets.png?width=716&name=Federal%20Reserve%20Total%20Assets.png)** The Fed balance sheet is a growing factor in markets that can produce an artificial straddle on the news. Improving data on containing the virus has logically driven markets higher, but downside surprises have also been stimulative based on expectations of the Fed buying more assets in response. This type of market intervention can be risky, particularly when it comes to [moral hazard](https://www.ft.com/content/52a46bcf-f238-43cd-82dd-c48c3c1883e3), but it’s a key factor in asset prices as the Fed endeavors to support the financial system. What will the impact of all of this be? With something as unpredictable as a virus, the set of potential outcomes is wider than it has been in the past. Additional waves of the illness are certainly possible – along with unforeseen knock-on-effects – and fitful stops and starts could create further challenges for businesses. Beyond the pandemic’s devastating toll on human life and extraordinary disruption, it will also leave behind enormous costs in dollar terms. Attempting to bridge the unprecedented gap in economic activity has already cost trillions, and further stimulus packages may still be on the horizon. Determining how economic support measures are paid for will not happen overnight, and this is likely to be a key issue in markets – and more broadly, society – for years to come. Despite these headwinds and unfamiliar challenges, it is important to remember the economy is built to adapt. As businesses reopen and people get back to work, new ideas and innovation will play a key role in the recovery. While the path ahead may be uncertain, the foundation for growth remains, and the time-tested, all-powerful engine of human ingenuity will ultimately drive us forward to a new economy. **\*\*\*** ![Andrew Dassori, Chief Investment Officer](https://blog.wavelengthcapital.com/hs-fs/hubfs/Andrew%20Dassori%20Headshot.jpg?width=150&name=Andrew%20Dassori%20Headshot.jpg) #### Andrew Dassori, Chief Investment Officer [Follow me on LinkedIn](https://www.linkedin.com/in/andrew-dassori-0112898/) Andrew founded Wavelength Capital Management in 2013 to make forward-thinking strategies available to all investors and is the firm’s Chief Investment Officer. In this role, he oversees all investment functions at the firm, including portfolio management, research and trading. He was previously a portfolio manager at Credit Suisse Asset Management focused on global macro investment strategies, and served as a member of the firm's Global Citizens Program. After growing up on the South Shore of Boston, he has lived in London, New York, and Nairobi, and now resides with his wife and two daughters in Connecticut. ## Related Articles [![](https://blog.wavelengthcapital.com/hubfs/The%20Perspective%20-%20By%20Andrew%20Dassori-3.jpg)](https://blog.wavelengthcapital.com/artificial-intelligence-for-investing-1) [Factor Investing](https://blog.wavelengthcapital.com/tag/factor-investing) [Fixed Income](https://blog.wavelengthcapital.com/tag/fixed-income) [Interest Rates](https://blog.wavelengthcapital.com/tag/interest-rates) [Mutual Funds](https://blog.wavelengthcapital.com/tag/mutual-funds) [Inflation](https://blog.wavelengthcapital.com/tag/inflation) [Wavelength Insights](https://blog.wavelengthcapital.com/tag/wavelength-insights) [Artificial Intelligence](https://blog.wavelengthcapital.com/tag/artificial-intelligence) ### [Thinking Ahead: Artificial Intelligence for Investing](https://blog.wavelengthcapital.com/artificial-intelligence-for-investing-1) On May 10, 2015, the Wall Street Journal featured an article with a title posing the question, *“Does Artificial Intelligence Pose a Threat?”*\[1\] As they highlight almost... ![Andrew Dassori, Chief Investment Officer](https://blog.wavelengthcapital.com/hs-fs/hubfs/Andrew%20Dassori%20Headshot.jpg?width=45&name=Andrew%20Dassori%20Headshot.jpg) [Andrew Dassori, Chief Investment Officer](https://blog.wavelengthcapital.com/author/andrew-dassori) [Read More](https://blog.wavelengthcapital.com/artificial-intelligence-for-investing-1) [![](https://blog.wavelengthcapital.com/hubfs/The%20Perspective%20-%20By%20Andrew%20Dassori-3.jpg)](https://blog.wavelengthcapital.com/the-future-of-market-efficiency) [Factor Investing](https://blog.wavelengthcapital.com/tag/factor-investing) [Fixed Income](https://blog.wavelengthcapital.com/tag/fixed-income) [Interest Rates](https://blog.wavelengthcapital.com/tag/interest-rates) [Mutual Funds](https://blog.wavelengthcapital.com/tag/mutual-funds) [Inflation](https://blog.wavelengthcapital.com/tag/inflation) [Wavelength Insights](https://blog.wavelengthcapital.com/tag/wavelength-insights) [Artificial Intelligence](https://blog.wavelengthcapital.com/tag/artificial-intelligence) ### [Thinking Ahead: The Future of Market Efficiency](https://blog.wavelengthcapital.com/the-future-of-market-efficiency) Amidst the recent uptick in volatility, an important question resurfaced: are markets efficient? People on each side of this issue now [share a Nobel Prize](http://www.bloomberg.com/news/articles/2013-10-14/fama-hansen-shiller-share-nobel-economics-prize-academy-says) so the debate... ![Andrew Dassori, Chief Investment Officer](https://blog.wavelengthcapital.com/hs-fs/hubfs/Andrew%20Dassori%20Headshot.jpg?width=45&name=Andrew%20Dassori%20Headshot.jpg) [Andrew Dassori, Chief Investment Officer](https://blog.wavelengthcapital.com/author/andrew-dassori) [Read More](https://blog.wavelengthcapital.com/the-future-of-market-efficiency) #### About - [Our Firm](http://wavelengthcapital.com/firm) - [Investment Philosophy](http://wavelengthcapital.com/philosophy) - [Fund Information](http://wavelengthcapital.com/funds) - [News](http://wavelengthcapital.com/news) [Follow us on LinkedIn](https://www.linkedin.com/company/wavelength-capital-management-llc) [Visit our website](https://blog.wavelengthcapital.com/www.wavelengthcapital.com) [Follow us on Twitter](https://twitter.com/wavelengthfunds) ### Follow our Insights DISCLAIMER: Wavelength Capital Management, LLC (“Wavelength”) is an SEC-registered¹ investment adviser located in Westport, Connecticut. Wavelength may only transact business in those states in which it is notice filed or qualifies for a corresponding exemption from such requirements. Wavelength's website is limited to the dissemination of general information regarding its investment advisory services to United States residents residing in states where providing such information is not prohibited by applicable law. Accordingly, the publication of Wavelength's website on the Internet should not be construed as Wavelength's solicitation to effect, or attempt to effect, transactions in securities or the rendering of personalized investment advice for compensation over the Internet. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in this report is derived from sources that Wavelength believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages. For information pertaining to the registration status of Wavelength, please view the United States Securities and Exchange Commission’s website at www.adviserinfo.sec.gov. A copy of Wavelength's current written disclosure statement discussing Wavelength's business operations, services and fees is available from Wavelength upon written request. Wavelength does not make any representations as to the accuracy, timeliness, suitability, completeness or relevance of any information prepared by any unaffiliated third party, whether linked to Wavelength's website or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. ¹ SEC registration does not indicate a certain level of skill or training.