Graph showing the rapid increase of jobless claims, and the rise of the S&P 500 over the same period (From The Wall Street Journal, May 9-10, p. A5).
It may seem to be a mystery wrapped in an enigma: Why has the stock market (e.g. the S&P 500, see graphic) continued to go up as jobless claims have now reached 33 million? It it a serious manifestation of cognitive dissonance that deserves some kind of explanation.
One explanation offered by the finance pundits is the extremely low interest rates, next to zero. These historically low rates mean trillions can be borrowed, as they have, but the borrowing costs mean the blowback will not terrify investors as much as they otherwise would. Add to that the fact that the Fed is committed to protecting the commercial paper niche - as connected to money market mutual funds- and one has loads of investor confidence that things will not go totally south.
But there are other factors to also consider (cf. WSJ, May 9-10, 'Investors Shrug Off Jobs Data') . Chief among these is the reopening of the economy, which moves "have encouraged investors that the economy is poised for a rapid rebound by early 2021'' According to one equity investor, R.J. Grant, quoted in the piece:
"People are making the bet that this is the bottom."
Well, maybe, but not necessarily, and even Grant had to concede (ibid.):
"The market is really divorced from economic reality right now."
Well, of course it is, never mind the media hype and endless scenes of yahoos and morons crowding into restaurants on Mother's Day, such as at one place in Castle Rock - about 40 miles north of us. The State Health Dept. - using its authority and order from Gov. Jared Polis- has since forced the place - C&C Breakfast and Korean Kitchen- to remain shuttered for 30 days. Its license has also been suspended for 30 days. Some lessons are learned the hard way! This sense was reinforced this morning as Dr. Ben Gupta - on 'Morning Joe' - noted only two states, Montana and Vermont, have actually met the standards to reopen at any level.
As for Trump's deranged claims yesterday that the U.S. leads in testing, Dr. Gupta quickly thumped them. He noted on a per capita basis (the only basis that counts) we are being beaten by every major country, and even the Czech Republic has 7 times more testing efficacy. Trump was so unhinged after a CBS reporter (Weija Jiang) put him on the ropes that he stalked out of the briefing like the coward he is, e.g.
by Cody Fenwick | May 12, 2020 - 6:53am | permalink
As Dr. Gupta observed, if some places open too early, before even a week's decline in cases is evident, there would well be a renewed outbreak such as now occurring in S. Korea. That could well trigger the worst of both worlds: a 2nd wave which mandates another lockdown in many states, coupled with an economy that is re-cratering. Further, these investors are making an assumption that may not be valid, i.e. that customers, people will readily fill the stores, restaurants etc. That may not be the case at all and in fact - despite the noisy protests on TV- a solid majority of Americans sees too early reopening as the real threat.
Reinforcing this, we learn that Goldman Sachs analysts tracking measures such as traffic in restaurants, have found "only very small gains". In other words, it is way too early for investors to display such irrational exuberance. This take was further bolstered by a piece today ('Hopes Dim For Speedy Rebound', WSJ, p. A2) where we learn:
"According to a survey by market research firm Coresight Research, more than 70 percent of people in the U.S. expect to avoid some public places after the lockdowns ease, with more than half saying they expect to stay away from shopping malls for more than six months."
That is definitely a blow - and reality check- for all those malls opening now, from Georgia to Texas.
Back to the stock market: the other takeaway is the rise is uneven, as well as divided. As per the initial WSJ piece again:
"The stock market is increasingly divided between the haves and the have nots - and the recent rally reflects the outperformance of a handful of stocks. Big technology companies, which re heavily weighted in the indexes, have driven much of the rebound, continuing a trend which was prevalent during the nearly 11-year bull market."
To fix ideas, five big tech stocks: Apple Inc., Amazon Inc., Microsoft Corp., Alphabet Inc. and Facebook Inc. together make up 20 percent of the S&P 500. All have been benefiting as Americans have sheltered at home, and virtual home schooling, combined with corporate work at home, have become the norm.
In the words of Giorgio Caputo, a portfolio manager at J.O. Hambro Capital Management (ibid.):
"The whole market is not up. It's the best of times for some firms and the worst of times for some firms."
As if to confirm that, we further read that the energy sector - which has taken the greatest hit - constitutes just about 3 percent of the broad stock index. In effect, their losses are disguised because "the stocks that have suffered the most have little sway over the market's direction."
The bottom line is that most stock investors can rejoice even as their compatriots on Main Street suffer with job losses, because they are "counting on a quick rebound next year."
But if a second wave of Covid- 19 strikes because of mass stupidity - and failure to appreciate the biology of the virus - all those nice hopes and dreams for another Bull market maybe flushed right down the toilet.
See Also:
Fauci: Reopening too quickly could lead to ‘really serious’ consequences
And
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