“The Markets Makes No Sense” and “Are the Markets Ignoring Reality”?
The title to this article is likely the most repeated phrase you have heard from the media over the last few months. As more and more bad economic news is presented through the media, somehow, the market just keeps grinding higher.
I think this picture taken from one of Jim Cramer’s shows expresses the disconnect best:
Doesn’t the market understand what everyone else clearly “knows:” we are heading into the next Great Depression?
As we have always tried to make our clients understand, the stock market and the economy are not one and the same. Rather, there is a reason that the stock market is considered the best “leading indicator” for the economy. And, it is purely because market sentiment is seen in action much quicker within the stock market as relative to the fundamentals within the economy, which take time to catch up to the market action.
To put it most simply, consider how long it takes you to effectuate growth in a business when sentiment turns bullish (obtaining funds, placing those funds to work in producing goods and services, marketing and selling those goods and services, earning profits, etc.) as compared to how long it takes to press the button on a computer to buy a stock. It is simply much faster to effectuate a turn in sentiment in the stock market than in the economy. And, this lag explains why the stock market always bottoms well before you see a turn in the economy. To illustrate this point further, David Rosenberg is the Chief Economist & Strategist of Rosenberg Research & Associates Inc., an economic consulting firm. On May 12, David predicted that the markets are ignoring reality and are simply not recognizing the effects that COVID is having on the economy. He believes that…
- The US will enter a depression
- See double digit unemployment for the next 3 years
- Have deflation followed by stagflation
- He points out that…
- 80% of the rally since the end of March has occurred on the days of the seven worst initial jobless claims of all time
- While the Department of Labor placed unemployment at 14.7% for April, the loss was closer to 27 million jobs, and that the discrepancy is due to people being incorrectly classified as employed.
- In addition to the 27 million jobs he believes we have already lost, we will lose another 5 to 10 million jobs in May, which would raise unemployment to ~30%.
- Rosenberg also compared our current situation to that of the Great Depression, stating that current stimulus, unlike FDR’s work policies, won’t provide later payback (1)
As of May 21, the Nasdaq is actually positive for the year while the S&P 500 is -8.52% and the Dow Jones Industrial Average is -14.12%. Why has the stock market rallied from the Nasdaq being down -20.37%, the S&P 500 down -30.73% and the Dow Jones Industrial Average down -34.7% at it’s peak on March 23?
If you remember back in 2009, the market bottomed in March, yet we were bombarded with increasingly worse economic news coming out for the remainder of 2009, along with record bankruptcies being filed in 2009 and 2010. Yet, the market was already rocketing higher during that same time.
If you were basing your investment decisions upon the fundamental perspective at the time we were striking the lows in March 2009 – or even any part of 2009, then you would have missed the first 100% rally in the market, and maintained your bearish stance for quite some time beyond. In fact, even as we moved into 2010, the market only provided us with a shallow pullback due to the continued excessive bearishness which was based upon those same economic fundamentals, whereas the market continued rallying for many years thereafter.
While I am not saying we will see the same thing happen for certain, I am saying this is how the market works time and again. So, either you learn from the lessons of market history, or you believe that this time is going to be different simply because the narrative is different. While you may be right that this time is different, history suggests that not to be the case.
Why is the Nasdaq positive for the year and technology stocks making new all time highs in the middle of the COVID 19 pandemic amid all of the negative economic reports and unemployment? Because there were trends that were in force prior to COVID 19 and these trends are only going to accelerate even more now. During Microsoft’s most recent earnings release and conference call, Satya Nadella, CEO of Microsoft said “We’ve seen two years’ worth of digital transformation in two months. From remote teamwork and learning, to sales and customer service, to critical cloud infrastructure and security – we are working alongside customers every day to help them adapt and stay open for business in a world of remote everything,” said Satya Nadella, chief executive officer of Microsoft. “Our durable business model, diversified portfolio, and differentiated technology stack position us well for what’s ahead.”
Satya’s quote “We’ve seen two years’ worth of digital transformation in two months” is absolutely amazing and is why “The Real Economy” stocks are doing so well. The real economy, however, has moved online. Companies that dominate online business also dominate the stock market’s capitalization.
Think about it. How are you doing your shopping now? Amazon for almost everything that is in stock, on-line grocery shopping for delivery or curb-side pickup (even though you could not get a delivery time for over a week in most cases), Zoom for web meetings and seeing family members, logging into Facebook multiple times each day to see what the rest of the world is doing, companies that are migrating their data to the “cloud” so that you and I can view information and shop anytime and anywhere we want and binging on Netflix shows, catching up on those movies or Netflix series we never had time to watch previously. As a result, you can see how well companies in the “Real Economy” such as Nvidia, Facebook, Netflix, Apple, Amazon, ServiceNow, Microsoft and Chipotle are performing on a year-to-date basis.
Everything is now taking place away from your eyes, off Main Street, in server rooms and cloud computing facilities you’ll never walk through or greet your neighbors inside of.
Online activity is taking a massive share of all commerce and human attention right now. It isn’t so strange that the companies benefitting most from online activity are seeing their stocks rally in response. It just so happens that those stocks are already the largest and most important components of the stock market’s indices.
This is the real economy now. Paypal has a $165 billion market cap, which is twice the size of Citigroup’s market cap. But PayPal doesn’t have a branch next to the hardware store where you live and Citi might. So it’s jarring. But it’s the truth.
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Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
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