The stock market is recovering from its March lows. That’s good news for your 401(k), I suppose–if you have one. President Trump tweeted Tuesday that this is the start of the “Transition to Greatness,” but even he recognized it will not happen this year.
Coronavirus has eaten the U.S. economy for lunch. Our GDP shrunk by 4.8 percent in the first quarter (most of that happened in March, after booming in January and February–think “cliff” as in falling off one). This quarter, ending June 30, is probably going to show a significant (up to 48%) contraction. This has led economists to believe the “rebound” isn’t going to be a big bounce, but more like a ball pit at a kids’ playground. We will land soft, and slowly climb out.
“The economy almost has to grow [in the third quarter] because we’ll be starting from such a low base,” Wright said. “Unless, of course, things seem to be looking good right now and then in July or August there’s another wave and we go straight back to lockdown. Then you could have another negative quarter.”
Given four possible recovery outlooks; a V-shaped, U-shaped with flat bottom, W-shaped with a couple of sharp bounces, and “Swoosh” shaped like the Nike logo, 58 percent of economists surveyed by FiveThirtyEight picked the Swoosh. Only one out of 31 picked the V-shaped recovery.
If unemployment is the key indicator of economic recovery, it’s probably going to be a long road.
In general, the consensus of the forecasters was that there is only an 18 percent chance that the unemployment rate will fall below 10 percent this year, and a 36 percent chance that it won’t fall below 10 percent until after the second quarter of 2021 — over a year from now.
But the stock market is not reflecting this lack of optimism. In fact, it’s going totally against the grain. This is because consumer sentiment, right now, is not locked to the stock market in a meaningful way.
The spread between the monthly percentage change of the S&P 500 and the University of Michigan’s consumer sentiment survey climbed to 32 percentage points last month, the widest-ever gulf in data going back to 1978, according to Dow Jones Market Data.The Stock Market and Consumer Sentiment Are Telling Different Stories, Wall Street Journal, May 27, 2020
What explains the gap? In all likelihood, government rescue packages.
Because of those rescue packages, markets are betting that the economic damage has a “time limit,” said Andrew Zatlin, founder of SouthBay Research, an investment advisory firm in San Mateo, Calif.
Expanded unemployment benefits will mitigate the consumer damage, he said, while the Fed’s liquidity inspired confidence among investors. Whether the market has gotten ahead of itself, he said, will become apparent over the next few months as more states relax restrictions and the economic damage is tallied.
The market is betting that the government will soften the impact through the end of 2020. That may be the case, but there will be winners and losers. None of that helps pay the rent, however.
A new weekly survey conduced by the U.S. Census Bureau foreshadows some really bleak news. According to an LA Times story, more than 20 percent of adults had “slight or no confidence in their ability to pay their rent or mortgage in June.” The ripple effect of uncollected rent, and uncollected mortgage payments is going to be hard to estimate, even with massive government PPP loans.
Further, a majority of businesses responding to a Census Bureau survey reported they did not expect to resume operations for at least six months, with many reported experiencing supply chain disruptions.
These rolling disruptions have led to odd items going through periods of scarcity while others, like toilet paper, become ubiquitous on store shelves once again. It could be meat, pork, or paper towels.
While the market can be sanguine on the ultimate recovery of most businesses, and of course, some that have profited due to the topsy-turvy demands of quarantine life, the economy itself will not quickly return to any semblance of “normal.”
The verdict here? Hang on to your investments, as long as you’re properly diversified. Make no giant changes or divestments. Make sure you can pay your bills, and if you can’t, work with your creditors, landlord, or bank.
The president is right about the “ups and downs,” and also right that nothing good will happen this year. As far as 2021 goes, I am not so sure it will be “one of the best ever,” but it won’t take much to be better than this year.
Take it as just one more reminder that the stock market’s gain or loss doesn’t mean the economy’s gain or loss. In this case, the market is betting long, while the economy is probably going to play catch up, possibly for years.