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ROBERT ARMSTRONG: Welcome to Charts that Count.
What's wrong with this picture?
The red line is initial US jobless claims
of which there have been about 26 million
in the past five weeks.
The blue line is the S&P 500, which
is up almost 30% from its lows in the latter part of March.
Now, no one wants to pile a financial crisis on top
of a public health crisis.
But it is very fair to ask why the stock market is feeling
so enthusiastic when millions of Americans are out of work,
and hundreds of thousands of businesses are still shuttered.
There are two basic points to keep in mind
about this at the outset.
The first is that the stock market is not
the consumer economy.
The S&P 500 is about 25% tech stocks.
Another 15% is in health care.
And both of these sectors have done very well
through the crisis, supporting the rest of the index.
The second point is that monetary policy still matters
and matters immensely.
Central bank's easing of interest rates
and their purchases of bonds have driven fixed income yields
down to almost uninvestable levels.
This in turn forces investors who require real returns
into the stock market.
But is either one of these factors
really enough to explain the strength we see in stocks?
I don't think that they do.
I think there is another assumption at play--
the so-called V-shaped recovery, the idea
that the economy, once the virus crisis passes,
will rebound very quickly and hit its old levels of growth.
There is also the assumption that this V-shaped recovery
will happen relatively soon.
But are we really so confident in this?
Last week, the US automaker Ford issued bonds
at a yield of nearly 10%, showing just how much investors
demand to be paid if they are going
to put their money at risk in a company that
depends on the strength of the American consumer.
Oil for future delivery recently fell to negative price.
The market is not as strong as it seems.
Be careful out there.
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