What is going on? What in the world is going on?
Last week I visited Garry Lyons, my local dentist. While lying in my dental chair, mouth wide open and unable to speak, his hygienist Andrea asked me the question on everybody’s mind, to wit: How come the market was going up when the economy is going to hell?
Twenty-one million Americans were unemployed as of May, and more than 40 million Americans were unemployed as of April. That’s one in every four American workers.
Those unemployment numbers are the worst since the Great Depression. In May, only 53% of our population was employed while 47% were not working. That is the lowest number of working Americans since the measurement of this statistic began in 1950.
The good news, if I can call it that, is that 80% of those who are unemployed today expect to be recalled to their jobs. In other words, their layoff is temporary. That compares to an average of only 20% thinking they would be called back to the workforce in previous downturns.
On June 9, I read two different headlines. One was at the Wall Street Journal while the second was online at CNBC.
The first reported on the economy; the second on the markets. The Journal reported the National Bureau of Economic Research just announced we were officially in a recession, which started in late February. According to them, two facts characterize this recession. First, it’s the deepest recession since WWII, and secondly, it’s possibly the shortest.
The coronavirus pandemic triggered 95% of the US economy being put into shut down mode from late March through early June. COVID-19 caused the unemployment rate, which had been at a 50-year low in February, to balloon to 14.7%, which was its worst post-World War II showing in history.
It ended a 128-month expansion that was the longest post-World War II bull run in history. Markets fell 45% from their all-time highs in just one month. According to the NBER, our decline in employment and production was unprecedented. And it stretched across the entire country. Economists project US GDP will post its worst quarterly decline in history when the second quarter ends, possibly dropping more than 50%.
No recession has lasted less than six months, going back to the mid-1800s. Will this be an outlier? Nobody knows for sure.
And yet, with all that bad economic news, CNBC reported that the market is on a tear. Yesterday, June 9, the NASDAQ is at an all-time high. That’s not high for the year; that’s a high for history. The S&P 500, which was off as much as 32 plus percent earlier this year, is back near positive territory for the year.
The Dow Jones Industrial Average recently completed seven straight days of positive gains; it’s up 45% from its March 23 low. In the last three weeks, all three indexes posted positive returns.
Folks, these things aren’t supposed to happen. And you certainly wouldn’t expect them to occur in an economic pandemic which was the most impactful since the Spanish Flu pandemic of 1918, and possibly since the Black Death pandemic in the Middle Ages.
The market’s performance is about as likely as lightning striking a Powerball winner. Any yet here we are. So how to explain?
When I was able to speak to Andrea, her dental instruments no longer exploring my mouth, this is what I told her. First, I started by reminding her about one of Westover’s fundamental tenets, one we remind clients of every day. That is, the economy and the market are siblings, but they’re not twins.
Any parent who has had children knows that each one is distinct and different. Yes, there are common characteristics, but there are also equal and sometimes strong differentiators, making each unique. We would never confuse one for the other.
Second, I also told her that the economy deals with the here and now. In contrast, the stock market deals with its prediction for the future. It predicts where it believes the economy will be sometime in the future, 12 or 18 months from now.
Ask yourself this question: where do you think we will be vis a vis our present health and economic situation in twelve to eighteen months?
So, here’s how you might think of it. There is a movie you and I want to see. It’s a popular film showing in Wilmington’s Riverfront theater. The title of the movie is “I Survived COVID-19, the Coronavirus Pandemic of 2020.”
This two-hour movie is so popular that it’s shown on two screens. To control the crowds, the films start on each theater screen an hour and a half apart.
We show up at the same time. You go into theater #1, getting the very last seat, as the movie is just about to begin. As you take your seat, the crisis is about to implode. The world, as we know it, is about to crash and burn.
I can’t be seated there, and so I must go to theater #2, which is showing the same movie. However, theater #2 started the film an hour and a half earlier, and so when I walk in, I start 30 minutes from the end.
At the film’s ninety-minute mark, I learn that, according to the World Health Organization, the asymptomatic spread of the coronavirus is “very rare.” This critical conclusion you did not know at the movie’s beginning. I also learn that notwithstanding the overall unemployment miasma, the May numbers added 2.5 million jobs, astounding forecasters and giving hope to investors.
The movie goes on. It’s June 9, and these three things happen: The NASDAQ composite hits an intra-day record 10,000 mark for the first time and ends up 45% ahead of its March 23 low. Amazon closes at an all-time high, up 50% from its March lows. So too does Tesla. It hits $949 per share, while you could have bought it for $361 on March 18.
I am watching the market version of the movie in theater #2 while you are viewing the economic version of the same film in theater #1. That’s how you must look at the markets and the economy. If this market is correct, then grab your Pepsi and buttered popcorn. Settle into that comfortable lounge seat because the movie still showing in Theater #1 is going to have a happy ending.
And as they say, That’s What’s Going On.