If you’re a Wall Street investor, that is.
Huh? Does now seem anything like last October to you? Even if you haven’t been personally touched by COVID-19?
Nothing is over. There’s promising news on vaccines, but there’s no vaccine. A very large number of people are still dying daily (something that’s almost never mentioned in the many financial page stories we read in preparing this piece). Businesses don’t know how to safely open, and with little guidance from the federal government, they’re gingerly taking steps on their own. Consumers–even if they still have jobs and money–keep getting thrown for a loop. (As one relative pointed out to us today: steak at Costco is 100% more expensive than a month ago.)
Yes, the Federal Reserve has literally committed unlimited amounts of money to support banks and corporations, and to a lesser extent cities and states, and that’s helped a lot. Because there really was no visibility for a while, and executives really had no idea what to do.
But are the Fed’s bold moves equivalent to a 100% successful vaccine against the economic ravages of the Coronavirus?
How can that possibly be? Yet the stock market seems to be saying something like “it’s been a terrible couple of months, but now it’s going to be all over.” Look, it took 17 years for airline stocks to fully rebound after 9/11, yet after its huge one-day surge Southwest Airlines stock is already 1/3 of the way back this time around. (Even airlines with a lot of international routes bounced back, though they aren’t doing quite as well).
Still, you have to look pretty hard to find places where the economy is convincingly starting to make a comeback, while you don’t have to look hard at all to see China using COVID-19 as cover to behave very aggressively toward Hong Kong, and in the Pacific, something that normally would really rock the markets.
Yes, the floor of the New York Stock Exchange reopened after Memorial Day for the first time in more than two months, and that’s no doubt a psychological boost. (Although the NYSE kind of just proved over the last couple of months it could function just fine without floor traders, so why is it putting them back in harm’s way? But it’s an independent corporation and we’d never suggest it didn’t have the right to make that decision if it thought that’s what’s best.) And the weather’s been good.
That all could account for a lot of optimism. But there’s a difference between an uptick in mood, and utter unbridled exuberance.
That’s led to a lot of talk these days of a big rebound in the second half of the year, among money managers, politicians, and the media. And yes if the virus doesn’t come back big the economy might soon start looking a lot better by then than it does right now, partly because it’s so unbelievably bad right now. But even so, our guess is the “V” shape economic recovery that Wall Street (heck, seemingly everybody) seems very eager to suddenly embrace has gotta be nonsense.
Because right now, economic growth is still a straight arrow down, and unemployment is still a straight arrow up.
Yet, the stock market’s already done it’s own “V” shape recovery. Today.
The stock market is said to be a leading indicator. Meaning it’s reflecting not what’s now, but what’s to come. So that’d indicate not only do investors believe the economy won’t be badly damaged at all, it indicates the economy will be hardly damaged at all. Although the stock market was hardly a great leading indicator when it continued soaring long after it was clear the Coronavirus had spread far beyond China.
Based on the numbers, as we said at the top, the S&P 500 now sits where it did last October. And 444% higher than its low during the last Recession.
So the question we’re asking today is not only is your life anywhere near the same as it was last October; anywhere near as stable? And also: is your life 444% better than it was 10 years or so ago? Unless the answer is “yes” to both, then someone please explain to us how what we’re seeing in the stock market isn’t completely ludicrous?
We’d love to be optimistic.
The reason we’re not is the level of job losses has been so astounding and they are not all just going to magically come back. Nor are free spending day-to-day lifestyles. Nor is the economy not going to suffer from at least scattered COVID-19 outbreaks and financial losses, which will have the greatest impact among the people least able to absorb it.
Maybe the stock market is trying to tell us that it expects the rich will get richer, and everybody else will get used to it like we always do (and the continued danger of being infected too!)
Or maybe as one trading director offered as explanation to MarketWatch, all those trillions in emergency funds from the government are just “sloshing around” and that money needs “to find a home”.
We think it’s even bigger than that: even before this all happened the U.S. had already become the all-time “King of Debt”. Both the government and the private sector. Even though corporations were already flush with cash as the result of a booming economy and tax cuts, they borrowed more and more and more at ridiculously low interest rates (although the President whined they should’ve been even lower so they could borrow even more). And even though it affected their credit ratings in some cases, they didn’t care because they could still easily sell the lower-rated debt. And even small and medium size companies, considered riskier because of less of a track record had an historically easy time raising cash (although they had to pay a little more for it).
All that’s now owed.
And so a lot of the froth we see in the stock market right now is borrowed money. It always is. But now probably an unprecedented amount. (There’s a really excellent story about this by John Cassidy, in the New Yorker.)
And an increasing amount is from the Federal Reserve. And even though—in order to keep the economy from locking up—the Fed has essentially pledged to keep lending forever, no bank will lend forever-ever.
And unless the economy comes roaring back like a rocket, with no virus in sight, we can’t see how that’ll not end up causing problems.
Perhaps not insurmountable, but if we are going to witness a glorious rebirth: an outcropping of lush economic growth, it’s sure as heck going to have to break through a slag heap of debt.