4/10/20 – Strong Week Sees Stock Diverge from Economy

Markets were closed today in observance of Good Friday. I hope you all have as good an Easter week as possible given the current situation. Another 6.6 million people filed initial jobless claims this week. That brings the three week running tally to over 16 million claims. To put that into perspective, the total number of people employed peaked at just under 159 million people in January. That means, in three weeks, over 10% of employed people lost their job and filed for unemployment insurance. That number is going to keep rising in the coming weeks as the shutdowns continue. Over 90% of the US population is under stay-at-home orders meaning all manner of economic activity isn’t happening. The ripple effects and ramifications of this will be felt for many quarters, potentially years. And yet the stock market is rallying and back to levels seen in early 2019, when the general outlook on earnings and economic growth was substantially better than it is today.

What is going on? The US economy is roughly $22 trillion. Between Congress and the Fed, there is roughly $4.5 trillion of stimulus coming. That’s 20% of the economy. That’s roughly double the stimulus during the financial crisis, so that’s an enormous boost to capital markets. But will that keep the economy afloat? Zeke Emanuel, a key architect of Obamacare and current special advisor to the World Health Organization said we need to stay in some form of shut down for another 18 months, “The kind of normal where we go traveling, we go to restaurants, we go to concerts, we go to religious services, we go on cruises, until we have a vaccine that protects everyone. That’s 18 months, it’s not going to be sooner.” That’s terrible for the economy. The National Association for Business Economics did a survey over the last week of economists and the consensus was ~50% of the jobs lost won’t be regained until after 2021. This level of unemployment will hurt almost every aspect of the economy. So, we have the economy in a severe slowdown and the Fed/Government trying to print/borrow enough money to bridge the gap. That’s possible to do if this lasts for another few weeks or even few months. It’s not possible in my opinion, if we’re on some sort of social distancing and non-normal plan through the end of 2021. Stocks are ultimately priced off earnings and if earnings are down over the next 18 months, I believe stocks have to follow suit.

There’s a chance with increased antibody testing, we’ll find that many more people have already had the virus. We hope that having had it provides some medium to long-term immunity like other viruses. We don’t know if the antibodies will protect people from slight mutations of the virus. There’s also a chance we can’t develop an effective vaccine in 18 months. There are points of optimism and points of concern. I scaled into some new positions this week, but remain comfortable holding a larger than normal cash balance. What I’d love to see is a full week of relatively calm days. Seeing the market move up/down 2%+ on a day, in a large, developed economy, still tells me that no one really has any solid outlook for what the next 6-12 months hold. For the week, the Dow gained 12.7% while the S&P 500 increased 12.1%. Both remain 18-20% below their peaks.

Oil decreased sharply this week, continuing its volatile run, declining 20.4% to close at $22.73/barrel. The yield on the 10-year Treasury increased to close at 0.73%, from 0.61% last week. The average rate on a 30-yr fixed rate mortgage held steady at 3.33%.

Join My Mailing List  

This entry was posted in Uncategorized. Bookmark the permalink.