@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?
@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.
@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.
@theMarket: Bulls Are Back in the Saddle
A spate of good news helped stocks this week battle the overriding pessimism of the last month. A possible drug to combat the COVID-19 virus coupled with a flattening of the virus curve in some regions helped the markets to gain ground. Can it continue?
It sure can, although a pause to catch our breath may be in order for next week. Gilead Sciences, the pharma/biotech company, has been working at breakneck speed to develop a drug to treat coronavirus patients. On Thursday, a report in a health-care publication indicated that its experimental drug, Remdesivir, was having some success in human trials. The indexes spiked higher on this news.
On the same day, Donald Trump and his crew basically turned the process of re-opening the economy over to the country's governors. That news was also greeted positively by investors, who have little-to-no confidence in an administration that has proven less than capable of handling the pandemic crisis.
As a result, stocks have continued their rally of last week, when the averages notched up better than 12 percent gains.
"How can this be?" inquired one client, who has a reputation for "chasing" the market up and down. We are getting the worst results in history — unemployment, earnings, COVID deaths — and the markets are going up?"
A client wanted to sell half of his portfolio on Tuesday, keeping the other half in the market. He proceeded to list for me all the reasons why that move was justified. But there was nothing I haven't heard or read over and over again for the last few weeks.
"Tell me something I don't know," I finally said. "If you and I are aware of all of this, then so is the market. Give me some new information that the market has not already discounted." He couldn't come up with anything. Fortunately, I convinced him not to act on his impulse, and as a result, he is better off today.
Investors are no longer focusing on the past nor the present, it is the future that has traders' attention. What states will get back to work first? When will there be promising results for a vaccine? When are Americans going to be able to be tested? Those are the unknowns and the direction of the stock market will depend on those outcomes.
Let's take the back-to-work dilemma. I want to go back and work in the office, but I have no way of knowing whether I will be infected if I do. None of my fellow employees have been tested, nor are there tests available to do so — unless they come down with the symptoms. By then, it would be too late for me.
That is the story playing out all over the nation. After all of this time, only one percent of the nation's population has been tested for COVID-19. All over the world, governments have focused on testing in an effort to control the spread of the virus, along with isolation. Why have we failed in achieving this objective, when so many others have succeeded? Is it because some in government are betting that what we don't know, won't hurt us?
And without widespread testing, there can be no back-to-work scenario
Opening up the country without the capability of wide-spread testing is simply playing Russian roulette with the lives of its citizens, in my opinion. It appears that for some corporations and politicians, the risks are worth it. My bet is that without this crucial element resolved, there can be no back-to-work scenario for the economy, and further gains in financial markets could be capped on the upside.
@theMarket: Virus Numbers Help Stocks
Stocks rose this week on the hope that the U.S. may be close to a peak in virus cases, at least in the country's "hot spots." Adding to the reduced case count, the government's efforts to support the economy and the market have had a positive impact on most financial instruments.
Some strategists have warned that the market's gains will prove to be ephemeral, once the fallout from this pandemic begins to seep into the economic data. Some of that data is already showing up. For example, Thursday's unemployment data revealed that another 6.6 million Americans filed for unemployment benefits this week. That brings the total close to 20 million people in three weeks. That is a historical pace of losses. Yet, the stock market gained on the news.
One reason the market went up (instead of down as many expected), was yet another stimulus program announced by the Federal Reserve Bank almost simultaneously. The Fed committed an additional $2.3 trillion to support the new Coronavirus Aid, Relief and Economic Security Act (CARES) Act, called the Payroll Protection Program and the Economic Injury and Disaster Loan Program. There was some concern by banks that loans to all these small-business owners might be a risky proposition, especially in the time frame that the government was demanding.
Stepping up to the plate to support these loans, the Fed has come in at just the right time to ensure the success of the government's fiscal stimulus effort. There is no telling what else the central bank may be willing to do. As it stands, Fed Chairman Jerome Powell said this week that "there's no limit on how much we can do as long as it meets the test under the law."
The only thing they can't do, I suspect, is buy equities out right. Of course, the U.S. Treasury could do so, and the Fed could fund the purchases. Given that kind of power, is it any wonder stocks skyrocketed again this week? It is for these reasons that I have cautioned readers not to sell. In this era of corporate socialism, even financial markets are fair game. The government's control of the economy and financial markets has never been this vast and far-reaching.
In addition to these events, there are also plans by the Trump administration to get people back to work as early as May. The success of this plan is largely dependent on the ability to test Americans for the COVI-19 virus. That is nowhere near possible today, but the hope is that it will be soon.
The White House plan would be for a gradual reopening of the economy, starting with those areas and cities that have low or non-existent cases of the virus. The risk here is that the effort might backfire. The transmission rate could reignite, for example, giving a second life to the spread of the virus.
As we enter this three-day holiday, readers should expect that after a 28 percent rebound in the S&P 500 Index from its lows on March 23, a period of profit-taking could be in order. We have reached an important technical level at 2,790. If we can hold above it, we might have a chance to close in on 2,900, however, the odds are not in our favor.
As we enter Passover, I find some similarity between those in Egypt and our own plight today. It may have been the blood of the lamb brushed above the door, or the mask and gloves we wear today, but I am sure the feelings are the same. I will take this time to hope and pray that this modern-day plague will pass over your homes and the loved ones who dwell within it. And for all the Christians and Easter Bunny believers out there, have a Happy Easter!