Morning Jog

Mantra

The stock market is not the economy.

We all know it. We all say it. But it is one thing to say it, and quite another to live through it. There were moments during the past few weeks, as I watched the market rack up successive gains amidst a wave of anguish and anger sweeping the country, with the persistent drumbeat of COVID in the background, that I wondered if it is even in the same universe.

Nasdaq at all-time highs, S&P 500 unchanged for the year, and small cap stocks (40% of which have negative earnings) down only 15%, did not jibe with the dismal economic data. Of course, markets are forward-looking, focused on the direction of change. And with Tech’s dominance, the large cap market benchmarks are certainly not representative of Main Street. Nevertheless, the dissonance was so glaring, that you could sense the collective sigh of relief from Wall Street strategists when the culprit for the unhinged behavior seen in some parts of the markets was identified.  Retail money, of course!

FOMO, zero commission trading, a lack of a viable gambling outlet with professional sports on hiatus, sprinkled with some stimulus checks from the government, were the perfect setup for online brokers. Robinhood’s trading app added 3 million accounts this year. E*TRADE, Interactive Brokers and Charles Schwab added 780,000 accounts in March and April.  Google search trends for “what is day trading” jumped. Armed with that knowledge, the new market mavens went to town, scooping up shares of airlines, cruise lines and companies in Chapter 11 bankruptcy.

Whether retail conviction holds, following Thursday’s stark reminder that markets can go down, and on occasion by a lot, remains to be seen. But to be fair, the directional stance some of them are taking is logical. Waiting for unemployment to fall to 3.5% and for corporate earnings to rebound to pre-COVID levels means missing the market opportunity.  And there are many indications that the bottom in economic activity was set in April.

The NY Fed’s Weekly Economic Index shows some stabilization in consumer, production and labor activity:



Air travel is gradually returning, such that passenger traffic is down only 85% from the prior year, and not 96% as it was mid-April. OpenTable restaurant reservations are picking up again, after a total collapse, and small businesses are starting to reopen:



None of this is particularly surprising, considering the lifting of the “stay at home” orders and the historically low staring level—after all, you can’t go below 0%!

The dissonance stems not from the direction of the market rebound, but from what its speed and magnitude implies about the shape of the economic recovery.  Swift monetary and fiscal action certainly helped to calm investors and put a floor under the falling markets in March.  Powell is committed to supporting the credit markets and financing government spending for as long as needed, and a CARES Act 2 is coming on the fiscal side. However, some economic damage will simply take longer to repair, further exacerbated by COVID continuing to make its presence felt, until a vaccine is developed.

It seems odd celebrating a 13% unemployment rate, as the markets did a week ago. But when economists were calling for the rate to rise to 20%, 13% (or even 16%, accounting for the likely error in May’s report), is a welcome sign that the worst of the lockdown-related layoffs is behind us.  Continuing jobless claims are declining and we may be at an inflection point in the jobs market, but it will be a steep hill to climb.



It took Powell acknowledging this reality, coupled with increased case numbers across several states, to take some steam out of the markets.  The stock market is not the economy, but it is in the same universe.

Enjoy your weekend.
Alex