Bad news is losing its bite. Is that good news for investors?

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Bad news is losing its bite. Is that good news for investors?

North American stocks have held up relatively well over the past couple of weeks, despite a pileup of dismal economic numbers and rising evidence that the global economy has essentially stopped.

The latest head-spinner: The U.S. economy shed 701,000 jobs in March, the U.S. Labor Department said, an eye-popping figure given that its survey doesn’t even reflect the full shutdown of the U.S. economy that took place in the second half of the month.

“Unfortunately, March’s horror show is just a preview of what’s in store for the next few months,” Krishen Rangasamy, an economist at National Bank Financial, said in a note.

Yet, investors responded to the employment survey with a collective shrug: The S&P 500 opened almost unchanged on Friday, before falling 1.5 per cent later in the day ahead of weekend uncertainty.

On Thursday, the stock market’s reaction was even more sanguine. U.S. initial jobless claims surged by more than 6.6 million, double the claims from the previous week and another example of how the novel coronavirus pandemic is causing an unprecedented economic collapse.

But far from selling off, the S&P 500 rallied more than 2 per cent for the day.

“My sense is, we’ve already lived through the volatility and weakness in anticipation of bad news, and I think that was the genesis for some of the extreme moves that we saw in weeks gone by,” Michael Gregory, deputy chief economist at BMO Nesbitt Burns, said in an interview.

In March, the S&P 500 moved up or down by 4 per cent or more on 14 trading days. The astounding level of volatility included a 9.3-per-cent rally followed by a 12-per-cent dive on consecutive days.

“The reason why the Federal Reserve and policy makers acted so quickly is that they saw something coming," Mr. Gregory added. “And now we’re starting to see everything happen. It’s kind of priced in.”

What’s also potentially priced into markets is a high level of optimism that the economy will rebound quickly.

Goldman Sachs strategists, for example, expect that profits for companies in the S&P 500 will decline by 33 per cent in 2020, as gross domestic product contracts by 34 per cent in the second quarter. However, the strategists also expect that profits will rebound by 55 per cent in 2021.

Even under a gloomier scenario, where S&P 500 profits fall 57 per cent in 2020 and the recovery is more gradual, Goldman Sachs expects profits will rebound 64 per cent in 2021 – offering investors a compelling reason for ignoring the current round of horrendous numbers.

They may decide to ignore an ugly first-quarter earnings season, too.

“There’s a chance that the guidance is going to be more important. The shock and awe of [negative] earnings growth and the negative GDP growth, we already know this,” Brian Belski, chief investment strategist at BMO Nesbitt Burns, said in an interview.

But stock market volatility could easily return if faith in a quick V-shaped recovery hits significant challenges. Lockdowns are being extended worldwide, raising concerns about long-lasting damage to the economy. The head of the International Monetary Fund said on Friday that the fallout from the COVID-19 pandemic was “way worse” than the 2008 financial crisis.

There’s also the question of whether the response from central banks and governments, which includes cutting interest rates, buying bonds and mailing cheques to sidelined consumers, will work.

“Policy support has been significant, but policy makers are clearly struggling to get some of these schemes off the ground – and that includes in Canada as well as the U.S.,” Paul Ashworth, chief North American economist at Capital Economics, said in an e-mail.

Still, empty public transit vehicles, plummeting auto sales and a gutted tourism sector indicate that businesses and individuals are heeding efforts to slow the spread of the pandemic. Success on that front may be the only indicator investors need right now.