Will the COVID-19 recovery be a “V” or “W”?
Written by Steven Bouchey
The big question weighing on investor’s minds right now is there a disconnect between stocks and the economy? It seems as though the COVID-19 recovery is forming a “V” like pattern rather than a “W” like so many expected. Stocks have risen as the economy mends itself and more goods news comes out pertaining to the coronavirus. Maybe those in the “W” camp need to be patient and wait for investors to realize that we may be in a very severe recession which will take time to get out of.
The S&P 500 fell from peak to trough, high to low, -34% over a few short weeks ending March 23rd, it was historical in how quick stocks entered bear market territory. Since then the broad market bounced back approximately 30%. Remember stocks have to recover +50% to get back to where they started falling on February 20th, so we are within another 20% rise to make all-time highs. To put returns in perspective, the S&P 500 is down -10% YTD after gaining +32% in 2019, Nasdaq Composite is up +1% YTD and up +15% over the past year while the Russell 2000 Small-cap index is off -20% YTD and down -16% for the past year.
April’s jobs report was sobering to say the least with a record 20.5 million Americans losing their jobs, 19.5 million from the private sector alone, and the unemployment rate jumped to 14.7%. The US hasn’t seen numbers like this since the Great Depression. The revised amount of net jobs lost for February-March were 640K, an additional 214K more jobs vanished than reported. Labor participation fell to 60.2 and hourly earnings rose +4.7% to $25.2 per hour. For those that wonder if going to college makes difference, the unemployment rate for those with a bachelor’s degree was 8% whereas those with only a high school degree was 22%.
Thursday’s jobless claims showed an additional 3 million filed for unemployment insurance for a staggering 33 million over the past several weeks, wiping out the almost 23 million jobs created since the Great Recession ended in 2009.
One can look at these jobs reports in two ways. A record number of people lost their jobs which is stressful and takes an economic and emotional toll, how can stocks rally on such dismal news? The silver-lining is that jobs reports are backward-looking so maybe as states open back up for business the outlook gets better.
There is a saying don’t fight the Fed especially as they print as much money as they are and stating that they won’t run out of money. So far, they have pumped over $3 trillion into the economy to support all the businesses and their workers who have been affected by this Black Swan event. The suffering wasn’t caused by anything other than a pandemic.
The US debt is approximately $25 trillion and growing, especially with all the stimulus spending. The projected $1 trillion deficit for this budget year before COVID-19 will more likely be closer to $4 trillion.
Some other concerns are consumer confidence dropping to 86.9 the lowest level in six years. GDP fell 4.8% and marked the end of a 10-year expansion for the US economy. Consumer spending fell 7.5% in March, its steepest decline since being tracked. Personal income fell 2% in March, the largest decrease since 2013. Oil fell so far it went negative, producers would have paid you to store their oil there was so much more supply than demand.
As Detective Joe Friday would say, “just the facts ma’am”. When investors look at the big picture it seems fair to wonder why is the stock market going higher. On the other hand, the markets are a discounting mechanism and it’s possible that the light at the end of the tunnel is getting brighter so they are pricing in a best case scenario.
We are in the camp of thinking that the other shoe will drop after all the good news surrounding how we recover and exit this COVID-19 time capsule subsides and we are back to reality. After all, the reality is it’s all about the economy with regards to stocks which doesn’t look so good and that’s what we are the most worried about. With that being said, we can be wrong and the other shoe won’t drop. I think I will watch A Cinderella Story again!