@theMarket: The Stock Market Is Not the Economy
If ever one needed an example of the above saying, today's market would prove that point. Friday's unemployment figure for the month of April revealed that 20.3 million Americans are out of work, bringing the unemployment rate to 14.7 percent. The stock market gained more than one percent on the news.
While new cases of COVID-19 are reported and deaths multiply with no cure or vaccine in sight, the NASDAQ turned positive for the year. Corporate earnings have been abysmal and future guidance nonexistent for most companies, but their stocks went up anyway. How can this be, you might ask?
As I have said before, the stock market is a forward-looking mechanism. As such, investors are looking beyond this troubling period and anticipating that earnings, and ultimately the economy, will recover. At that point, we could see a typical "sell on the good news" event, but not now.
The economic data gave us some additional information on the victims of the pandemic. For one thing, the jobless rate would have been higher (by about another five percentage points), if workers had not classified themselves as "absent from work" instead of unemployed. Still, it was the largest, single monthly decline since record-keeping began back in 1948.
The leisure and hospitality industries led the declines, although every industry category experienced job losses. The majority of jobs lost were in low-paying areas indicating that wage earners at the bottom of the scale are taking the brunt of the virus fallout. It also explains why the average hourly wage gain suddenly increased by 4.7 percent, since, with so many low wage earners gone, those with higher wages predominate in the survey.
None of that mattered to the markets. From a financial point of view, the actions of the central bank in pouring trillions of new dollars into the financial system are why stocks continue to run. The Fed has all but nationalized the country's debt markets by buying or at least guaranteeing that they will be the buyer of last resort.
This week, I suspect that many investors, who tend to follow the headlines in making investment decisions (big mistake), and who sold during the recent downturn have been waiting for a chance to get back in on a re-test of those lows. threw in the towel. Those stock chasers are rushing back into the market now (and are probably late as usual).
One of the worries I have, however, is the overly large concentration of buying in a handful of mega stocks, especially the FANG names. The action is similar to the frenzied FOMO buying experienced at times when marijuana stocks or the meatless burger was "hot." I hope to see a broadening out of buying interest into more sectors and securities in order to feel more comfortable in the short-term.
Otherwise, like always, readers should soon expect to see some kind of corrective pattern descend upon the equity markets. We did have a 2-3 day sell off totaling about 4 percent from the highs a little over a week ago. The same thing could happen next week or the week after. That is the price of doing business in the stock market. The point is that until new data can show conclusively that the COVID-19 virus is on the waning, there will be that on-going risk of a 10 percent pullback. So, what?
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The Independent Investor: Workers face a serious dilemma
During the last week or two, the federal government has done an about face concerning the impact of the ongoing coronavirus pandemic. From the nightly exhortations to social distance, work at home, and expect more deaths, the message has now switched to go back to work, re-open the economy and, oh, about those deaths, expect even more.
The Trump White House has "officially" left it up to the governors of the states to set a timeline for reopening their economies, since it is illegal to do anything else. The guidelines advise that each state should monitor the number of new cases. Only when they see hard evidence that those cases have not only plateaued but started to descend, then it would be safe to consider a gradual re-opening of the economy.
However, that is not what is happening. Informally, the president is doing everything in his power to convince, cajole, and threaten states to reopen, regardless of the human toll. As such, the president has once again turned a national crisis into a partisan battle for supremacy.
As a result, many states (mostly with Republican governors beholden to the president) are ignoring the guidelines, even as coronavirus cases continue to increase in some of their states. And while state residents are supposed to continue to socially distance, wear masks and follow other guidelines, many are not only ignoring those restrictions but are actively protesting against them.
While large and small businesses alike lobby to open, the labor force is expected to toe the line and show up for work. If workers, afraid for their health, balk at these orders there will be hell to pay. Aside from the threat of being laid off permanently, the states and companies have other means at their disposal.
Technically, if the state governments, for example, no longer consider the pandemic as a reason to claim unemployment, two things could happen. Workers would be unable to file for unemployment. Companies could also suspend health insurance benefits at the same time. Cruel, but effective. In addition, there is an added benefit to the politicians. The unemployment rate would come down, because those workers who refused to go back to work would not be "officially" counted as unemployed and would be taken off the jobless rolls.
From the administration's point of view, with just six months left to the election, the economy needs be on the mend by then, and unemployment dropping. However, over the last several days, many areas of the country continue to experience both a rise in COVID-19 cases and a higher death count. Given those facts, the political and economic argument has necessarily had to change from "things are getting better, so re-open" to "sacrifices must be made just like in any war."
The issue for workers is that they are on the front line. Reported cases of virus-infected employees at various "essential" businesses such as Walmart, Amazon, and several meat processing plants throughout the country, make the danger all too apparent. What is worse, few of these establishments have done much, if anything, to attempt to safeguard returning workers from catching the virus.
What makes the situation even worse is the continued lack of testing throughout the country. Not only does that dilemma understate the number of cases/deaths attributed to COVID-19 but leaves workers completely at the mercy of whomever walks through their doors. This lack of testing has already led to multiple cases of the virus in some stores, plants, and other companies, especially where workers are packed together.
And yet, as the government ignores its own medical experts, and urges businesses and workers to return to work, is there any recourse? Out of work, worried about how to support their families, it appears laborers will be forced "to do," and maybe die, or at least get real sick as a result.
I suspect that if this scenario does play out, lawyers will be busy from here to eternity as individual employees and worker class action lawsuits proliferate. Of course, as a next step, the government could rule that companies in this situation would be held harmless. That sort of legislation is being discussed presently. If so, workers may have no recourse at all.
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@theMarket: Earnings Fail to Support Stock Market
Despite the expectation that earnings this quarter and next were going to be a disappointment, stocks have been gaining. That is because results have not been as low as some analysts have projected. However, when is better than bad not good enough for investors?
It appears we have found out this week. It is a known fact that mega-cap, technology companies (the FANG stocks) have been leading the market throughout this rebound. This week, several of these companies reported and while the results, in some cases, have been stellar, (given the overwhelming economic negatives in the economy), others were simply "acceptable."
Two of the largest market darlings, Amazon and Apple, reported after the close on Thursday night. The verdict appears to have been disappointment, despite both companies accomplishing a mammoth task to produce the numbers they did.
But sometimes the market just needs an excuse to go up or down. I suspect that the FANG stocks are that excuse for traders to finally take some profits after an almost 20 percent uninterrupted series of gains. There could also be a couple of other factors that contributed to this week's decline.
For instance, we know that stocks discount future events. The market began to climb while we were all in the throes of lockdowns, stay-in-place orders and death counts. That's because the market was already looking beyond these events and discounting the future -- the re-opening of the economy. This week, more than 37 states announced plans to do just that. Good news, for sure, but news that the markets had already discounted, in my opinion.
What, you might ask, is the market discounting now? It could be the realization that this virus is not going away any time soon. The latest medical reports seem to indicate that COVID-19 could be with us for at least the next two years. If so, what impact will that have on the economy, on earnings, and on the labor force?
Those calculations, those "what-if" scenarios, are presently the grist of the stock market's mill. Then there are the elections, now only 6 months away. The poor handling of the pandemic has dented Donald Trump's chances for re-election. He knows that and so do the Democrats.
With so little time, and the knowledge that a recessionary economy usually spells doom for the incumbent, Trump needs to go on the offensive.
Blaming others for mistakes has always been part of his repertoire. Americans, you see, love to cast blame on anyone and everyone, as long as it is not themselves. Trump learned how to use that knowledge to his benefit. Who could be Trump's "go-to" whipping boy?
China. I expect to see a mounting crescendo of threats, accusations, and Chinese conspiracy theories erupt from the White House. After all, didn't COVID-19 originate in China?
What other excuse does a campaign in trouble really need?
We all know how two years of China-bashing impacted world markets. Trump's tweets sent markets up or down continuously. Economies slowed, tariffs were raised, and in the end, Trump bragged about a "Phase One" deal that was largely symbolic. By the way, that strategy did not work out too well for him in the mid-term elections.
Doing that again, combined with the real issue of an on-going pandemic, may be worth discounting now, or so the stock market seems to think. Last week, I said if the markets decided to head south, we could see a 5-10 percent correction. We have already logged in about 3 percent of that decline between Thursday and Friday's sell-off. I do not think that we are going to re-test the lows, however, unless the re-opening of America backfires and COVID-19 cases re-escalate.
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The Independent Investor: If You Are Laid Off, Read This
As of the end of April, more than 30 million Americans have joined the ranks of the unemployed. Companies have closed, while the pandemic has forced many employees to remain at home. If you are one of the jobless victims of this pandemic, here is some advice on your next steps you might take.
First off, do not panic. If there was ever a time for this to happen, it is now. The federal government has provided you with a list of additional benefits that can help you through this unfortunate period. But the first things you want to know is will there be a severance package? If there is, the amount of money you receive will most likely be determined on your length of employment. It may also come with other benefits.
You may be owed for accrued sick time, vacations, overtime, or back pay. The most important item on your list, however, is continued health-care insurance, especially during this pandemic. COBRA (Consolidated Omnibus Budget Reconciliation Act) gives you the option to continue on your company's health care plan for a limited period of time.
Your next step is to determine the guidelines in any tax-deferred savings or pension plans you may have contributed to through the years. If, for example, you are a member of a defined benefit plan, your benefits probably begin at retirement age. In the meantime, you might be able to roll that plan over into another.
Most companies offer a 401(k) plan, profit-sharing plan or something similar. In which case you can keep it there, at least until you find a new job and then you can roll it over to your new company's plan. You can cash out, but that is something I do not recommend without discussing with an investment advisor. You can also roll your plan into another tax-deferred vehicle, like an Individual Retirement Account.
Your next step is to file for unemployment. The good news is that the government has added an additional $600 to your weekly compensation up until the end of July 2020. They also extended the number of weeks you are eligible for unemployment from 26 weeks to 39 weeks.
If your company shuts down unexpectedly, it may be that some employees will need to tap their savings plans in order to cover expenses while they seek new employment. That kind of disaster has hit home to me personally this week. Our firm is fairly close to a beautiful little town called North Adams in Massachusetts. North Adams' claim to fame is that it is the home to the Crane Stationery Company, established in 1801 by the Crane family. The Crane Family later moved into printing currency for the U.S. mint.
This week Crane Stationery announced that they will be laying off 85 percent of their workforce. The company promised to pay its employees up until June 19 and will continue to cover its share of group health care benefits through to the end of June. The news was a devastating blow to both the workers and the community. Crane was one of the top employers in the town.
We at Berkshire Money Management will be opening our doors to all and any of the company's employees who are in need of financial advice for the foreseeable future. So, if you are an employee or know of one, please contact me and our team will do all we can to help.
In the meantime, I thought it might be appropriate as the national employment rate tops 20 percent, to once again review the elements provided by the CARE Act as it relates to withdrawals from your 401(k). Normally, if you need money from a retirement account, and you are under 59 1/2 years old, you are required to pay a 10 percent penalty, plus the income tax owed on your withdrawal. There are some exceptions to the rule and the CARES Act just added a big one. The federal government just eliminated that 10 percent penalty for any distributions from IRAs, employer-sponsored retirement plans, or a combination of both.
Individuals can withdraw up to $100,000 in 2020, as long as the withdrawal is "Coronavirus-related." That definition leaves plenty of room for interpretation. If you or a spouse or dependent have been diagnosed with the virus, you qualify. If you or your family have been hurt financially by COVID-19 as a result of being laid off, quarantined, or having reduced working hours, you qualify.
There is even better news. Let's say you take out the money, which you will need to tide you over for the next nine months. After that, the economy begins to revive. You get your old job back. If so, the government is allowing you to repay or roll the money you borrowed back into your retirement account. You will have three years to do so. You can return all, or part of what you took out and repay it in a single lump sum, or in multiple repayments. You will still need to pay regular taxes on whatever you take out this year, but the entire tax bill does not have to be paid in 2020.
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@theMarket: Economy Craters as America Attempts to Reopen
As the economic and unemployment numbers reveal the devastating impact of the coronavirus, a struggle has developed between those who want to reopen the economy now, and others who fear the consequences of doing so. Is it truly a trade-off between economic life and additional deaths?
No one knows, but plenty of people and red-state politicians seem willing to take the chance. Those in blue states, which have been hit the hardest by COVID-19, along with the entire international medical community, want to take a more cautious approach.
As far as the markets are concerned, the roller-coaster ride that sent the averages up and down on a daily basis this week was simply a reflection of this on-going argument. As readers are aware, investors can and will plan for a known outcome, whether good or bad. They resist taking an action if the outcome is unknown. What we have here is one big unknown.
It struck me just how fragile this 28 percent rebound in the averages is right now. For example, Gilead, a biopharmaceutical company, that investors hope may have developed a drug (Remdesivir) for the treatment of COVID-19, erased just about the entire gains of all three averages Thursday.
The World Health Organization mistakenly revealed the findings from an incomplete clinical trial by Gilead conducted in China on its website. The study stated that the drug failed to speed the improvement of patients afflicted by the virus. WHO took the posting down quickly, but the damage was done. The markets erased gains despite the fact that an additional, much more meaningful, study should be forthcoming in the coming weeks.
As the unemployment rate skyrockets, erasing virtually all the employment gains of the last decade, and the data on the economy becomes worse and worse, Corporate America and a large segment of small businesses, are demanding that the country get back to work, despite the human costs. Of course, it is couched in terms like "reasonable," "safe" and "slowly," but open nonetheless.
Investors have been tugged in opposing directions. Statements from various governors on immediate plans to reopen are encouraging the markets, while the continued information flow from other states and the medical community about the spread of the virus have investors unwilling to push the markets higher.
A New York study measuring the spread of the COVID-19 virus found 13.9 percent of people tested had signs of the virus. If you extrapolate those results on a statewide basis, about 2.7 million New Yorkers may have the virus. That's about 10 times the official count based on the testing of mostly very sick patients. And that illustrates the crux of the matter.
Without the ability to test the population of the United States, there is absolutely no way of knowing whether going back to work on a national basis will simply lead to a "round two" and a further blow to the economy, which some believe could send us into a second depression.
Critics point to that very thing happening during the 1917 influenza pandemic. The country was loath to quarantine its citizens as World War I got under way. Infected American troops were sent into Europe, which caused the flu to spread worldwide and mutate. By 1918, a second wave hit America and in a three-month period decimated the country. Could it happen again? Doubtful, but few medical professionals want to take that chance.
Rational readers might ask the obvious question: why, after five months, and millions of people infected, has the United States government failed to develop, buy, and/or administer enough tests to reveal the true extent of the virus in America? The technology, materials and know-how exist. If China, Europe, and even some emerging markets, like South Korea, can do it, why can't we?
It is a mystery that continues with no explanation, despite daily "briefings" by the White House. The only reasonable explanation, in my opinion, is that our government is deliberately avoiding testing, but for what reasons?
In the meantime, the markets seem to me to be close to a resolution over this debate. For the last two weeks, we have been in a trading range. For the S&P 500 Index, the bottom of the range is around 2,720, while the top is just around here at 2,800. As I have explained, so much of what will dictate the next move in the markets is outside of my expertise.
If Gilead's drug, or some other breakthrough vaccine, should be developed, the markets could break out on the upside, and we could easily see another 100-plus points tacked onto the index. If, at the same time, those states that go back to work have no problems, that too could encourage the markets. If, instead, virus cases ramp up in the country, as a result of going back to work, we could break 2,702 on the downside. If so, expect another 5-10 percent pullback. I wish I could be more certain, but this pandemic remains a big unknown to all of us, present company included.
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