The U.S. jobs market is in a crisis unlike any other in history.
More than 40 million Americans are out of work as entire industries
have frozen during the coronavirus pandemic.
The unemployment rate has skyrocketed to its highest level since the
Great Depression. Americans have taken to the streets to protest
police brutality and racial and economic inequality.
Yet on Wall Street, the picture looks very different.
The Dow rising by 553 points.
Wall Street pushed higher to start a new month.
Stocks rising yesterday with the Nasdaq closing at its highest level
since late February. The S&P 500, which tracks 500 large publicly
traded companies in the U.S., surged 40 percent from its low point in
March through the beginning of June.
The stock market and the economy haven't always moved in tandem.
But the recent separation between the two has been especially stark.
The result is a growing divide between Wall Street and Main Street.
If there was any doubt before, there should be no doubt now that we
have completely divorced the economy from the stock and the bond
markets. Some investors warn the market is too hopeful.
As businesses and consumers face extraordinary uncertainty from the
pandemic and social unrest.
I think the market is overvalued.
I think it's almost impossible to predict where consumer and corporate
demand is going to come from.
Others say the market's right to keep moving higher as the economy
reopens and policymakers stand ready to provide more economic
stimulus. It doesn't matter what happens to fundamentals.
It doesn't matter what happens to corporate earnings.
It doesn't matter what happens to economic growth because the Fed
will buy what I want to buy.
That's the mindset of the market right now.
So how can stocks move higher with the economy in such bad shape?
There's a saying among investors, the stock market isn't the economy.
The stock market offers a window into the economy by tracking
publicly traded companies.
But plenty of Americans work for companies that aren't public, and
they spend money on goods and services that aren't directly reflected
in the stock market. Another key difference is the stock market tries
to predict what will happen in the future.
While economic data reflects what's happened in the past.
The stock market is a bit of a leading indicator because investors are
looking forward and doing a forecast in the stock market is the
collective forecast of all those investors.
When the stock market goes down, more investors are selling stocks
than buying them. That means collectedly, traders are less optimistic
about the future prospects of companies earnings and the overall
economy. It's not reflective of how the economy is doing today, but
how the economy and businesses are going to be doing three, six, nine
months from now. The financial crisis from 2007 to 2009 helps
illustrate how the stock market is a forward looking indicator.
The S&P 500 hit a bottom in March 2009, then rallied more than 60
percent by the end of that year as investors became more optimistic
about the economy. During that same time, the unemployment rate
continued to rise, ultimately peaking at 10 percent in October 2009.
When you go back to March of 2009, when the market eventually
bottomed, the news was getting worse.
The news wasn't getting incrementally better.
But stocks stopped going down.
Stocks had efficiently priced in what they thought was worst case
scenario. It started looking out to a future that was modestly
better. Most economic data, on the other hand, give a look back in
time. For example, official GDP data for the first quarter, which
reflects economic activity in the first three months of the year, is
typically released in April.
It takes government officials time to gather and analyze information
about consumer spending, business investment and other key metrics.
When we get the first quarter, GDP numbers rose like, oh wow, they
didn't look that great. First quarter about time you get that you're
halfway through the second quarter.
So the economic data, by its nature, is backward looking.
In the short term, the stock market is much more volatile than the
economy. The Dow Jones Industrial Average might swing thousands of
points from day to day, even as the economic data stays the same.
Plus, it's not just economic data that moves stocks.
Factors ranging from geopolitical tensions to politics to trading
algorithms can affect market moves.
At any given point in time.
The stock market may not be a good representation of anything other
than the collective sentiment of the people that are participating in
that market. The forward looking nature of the stock market is one
reason why stocks have surged in recent months, even as the economy
has collapsed. While jobless claims spiked in April and May, some
investors expect employment will bounce back later this year as the
economy reopens.
As investors continue to be optimistic over the gradual reopening of
the economy. Protests, curfews and property damage are complicating
the reopening in many cities, but not enough yet to change the
general expectation of increased business activity through the
summer. Many traders are pinning their hopes on positive developments
toward a COVID-19 vaccine, which would speed up the economic
recovery. What's it worth to get a vaccine or hopes for a vaccine?
About 35 points on the S&P.
Look at that, 730 before it came out and we just went straight up
from there. I would argue that health care news right now is more
important than economic data and earnings.
And I think that's going to be the case for a while.
And the real reason behind that is this is a pandemic that will end
when we feel comfortable going back out into the public.
Historically, the stock market benefits from signs the economy will
improve even if it's not happening right away.
Markets have actually done very well when really bad news gets less
bad. And we suspect that we're going to see incrementally, that news
gets less bad in the coming months, in the coming quarters.
Bad news for the economy or the average American can also translate
into good news for individual stocks.
The share price of Uber, for example, surged 9 percent in one day in
May after the company announced layoffs and cost cuts.
When wages are low, which they've not been doing very well.
Profits are high.
Stock market loves high profits and low wages.
But the economy doesn't like low wages.
You don't have people to buy your goods and so forth.
Many stock market investors have also been encouraged by aggressive
stimulus from the Federal Reserve and Congress.
What we've been able to do is to help markets return to more normal
functioning, which has the effect of buying time, buying time for
health care professionals, buying time for governments to respond.
Since mid-March, the Fed has lowered interest rates to zero and bought
trillions of dollars of assets.
Low interest rates encourage companies and consumers to borrow money
at a low cost. The Fed is all in.
They're telling as strongly as they possibly can investors that
interest rates are going to remain near zero for a long, long time.
So if you're a stock investor listening to that, that's a signal
that, you know, there's there's a limit to your downside that there's
a. floor under stock prices.
Congress has also authorized trillions of dollars of economic stimulus
during the crisis. The government has put almost 3 trillion dollars
of money into the economy.
Some of that money is finding itself finding its way into the
market. With interest rates and bond yields set to remain low for a
long time. Some say investors have no other choice but to put their
money into stocks.
One study even found some Americans use their stimulus checks to
invest in the stock market.
Low interest rates leads to high stock prices.
People don't want to put their money into bonds.
They want to put their money into the stocks.
Another explanation for why stocks have surged despite high
unemployment requires a closer look at the stock market itself.
A handful of companies really disproportionately perform and inflate
the equity markets.
Five stocks account for around 20 percent of the overall market value
of the S&P 500.
Those five companies are Microsoft, Apple, Amazon, Google's parent
company Alphabet, and Facebook.
Four of which have market valuations above or near 1 trillion dollars.
These stocks have rallied big time over the past three months, giving
a boost to broader markets.
Think about those companies and how much more business they're doing
because we're working from home. That's been part of the leadership
that's driven this market. So some of the drivers of the market's
performance off of the lows has been companies that are actually
doing very well in this environment.
Other smaller tech stocks have also benefited from stay at home
orders. The share price of Zoome has nearly doubled over the past
three months. You can't just say, well, with did we shut the economy
down so the market should be going to zero.
You have to look at what is keeping us going during this current
environment and are those stocks outperforming?
And I would offer up they probably are.
By some accounts, the gap between Wall Street and Main Street now
looks wider than ever.
Many retail investors have kept their cash on the sidelines as they
try to wait out this economic crisis, meaning they haven't benefited
from the recent bounce back in markets.
There's a lot of people who got out of this market and are staying
out, making the assumption that either we have to test that low again
or things are actually going to get worse, not better.
Many aren't invested in stocks in the first place.
Only 14 percent of Americans are directly invested in individual
stocks, while 52 percent have some level of investment thanks to 401K
or retirement accounts.
Among those who earn over 100,000 dollars, stock ownership is much
higher at 88 percent.
So gains in the stock market disproportionately benefit wealthy
Americans. This chart shows how the longer term link between stocks
and consumers has been broken in recent months.
Consumer sentiment plunged from February through May as the S&P 500
rallied. Some say the stimulus efforts from the Fed and Congress have
benefited big companies and Wall Street more than average Americans.
The problem wasn't just the amount of money.
It's how the programs were designed.
The money didn't go to where it was most needed.
Others warn the stock market has risen too much.
Given the outlook for the economy during the pandemic.
Stock investors have gotten ahead of themselves are putting too high a
probability on a V shaped recovery.
The economy and the markets have gone through other phases where
they're not in lockstep.
Take, for example, in 2018, when quarterly GDP growth reached its
highest level in nearly four years.
Yet markets stumbled because of uncertainty over trade policy.
Still, in the long term, markets and the economy generally have moved
in the same direction as they're both affected by factors like
corporate earnings, productivity and changes in demographics.
The question is whether the current disconnect is the start of a
longer lasting trend.
While the economy drives corporations ability to earn the decision as
to what those earnings are worth are driven by humans and humans make
emotional decisions and multiply that by the tens of millions of
investors that are making emotional decisions every day.
So you have to put all those things in context.