The stock market has been on a wild ride in 2020. It started the year on a high note, rolling through to February 12, when the Dow Jones Industrial Average hit an all-time high close of 29,551. News of the coronavirus was already a daily staple at that point, but Wall Street was continuing to do what it does best: ignoring bad news. That’s been part and parcel of the Wall Street-Main Street disconnect at least since 2009.
But as is always the case, market crashes begin from new highs. And so it’s been this time as well. While February 12 was the high mark of the market, it was also the beginning of the end – or so we thought. That was the day Wall Street finally “got religion”, and “discovered” the coronavirus and its implications for the first time.
Finally – at least it seemed – Wall Street was seeing the same reality the rest of us were. The Dow fell all the way to 18,591 on March 23, for a decline of nearly 11,000 points, or about 37% over a space of less than six weeks.
Then something very “Wall Street” happened – the market staged a rapid recovery. By last Friday (April 17) the Dow closed at 24,242. It was an increase of more than 5,600 points in a space of just 3 ½ weeks, for percentage gain of more than 30%.
If aliens were to track the health and prosperity of the human race using the stock market as a barometer, they would assume all is well all the time, punctuated only by the occasional hiccup.
That’s the way Wall Street sees it. But the average Dick and Jane – who live in the real world – usually see something much different.
The Coronavirus and the Economic Damage it’s Causing
If we can leave Wall Street for a few moments, the news in the past couple of months has indeed been grim.
Let’s start with the coronavirus itself. The number of people infected worldwide has climbed to 2.4 million, and continues to rise at a staggering rate each day. More than 750,000 of the cases, or nearly 1/3 of the global total, are here in the US. More than 160,000 people died worldwide, including more than 40,000 in the US.
Some have argued these numbers aren’t all that scary, at least in comparison to other diseases and viruses. But it must be remembered that the casualties have reached that level after just two months, which indicates the virus is moving at staggering speed. Many may have faced similar or greater pandemics in the past, but none in a human lifetime, and none that have moved this quickly. Meanwhile, there’s no indication how or when this will end, nor is there a cure. Uncertainty rules the day.
No matter who you are, and what your circumstances are, that’s all terrible news. We’re talking human carnage here. People are losing loved ones, and even those who recover from the virus are reporting ongoing health problems.
While all this happens, the explanation is that Wall Street is looking past the bad news, focusing on the flattening curve and the promise of a cure. Both may be reason for hope, but hardly for celebration. At least not on the scale we’ve seen with the stock recovery of the past three or four weeks.
The Economic Side of the Coronavirus and the Impact on the Wall Street – Main Street Disconnect
It’s been said the coronavirus is both a health crisis and an economic crisis. The shutdown and general fear over the virus is taking a deep toll on the economy.
Consider the following:
- The latest numbers show 22 million Americans unemployed. Based on a workforce of approximately 150 million, that’s an unemployment rate of nearly 15%. That’s easily the highest since the Great Depression. What’s more, increasing unemployment is fully expected.
- The Federal Reserve has made so many cash injections and promises of injections that it’s hard to keep track of how much they’ve made available. There are several, including a promise to make unlimited bond purchases. That’s the kind of thing that happens only when the economy is in free-fall.
- The US budget deficit has already reached $2.4 trillion. We’re only a little more than halfway through the fiscal year. That’s about three times what it was for all of last year.
- Due to the shutdown, hundreds of thousands of small businesses are likely to dramatically reduce operations. The lack of cash flow is almost certain to guarantee many will not even reopen.
- The number of major companies filing for bankruptcy or rumored to be heading in that direction is multiplying by the day. Some industries, like retail, were already in trouble and the virus accelerated the process. But they’re being joined by other industries, like airlines, oil companies, and cruise lines. Expect more.
Closer to the ground, one-third of renters didn’t pay their rent on April 1. A similar situation with mortgages is expected in May. An unemployed person may be unable to make their house payment.
But if we follow the recent moves in the stock market, apparently none of this matters.
The Real Reason Stocks are Rising: The Federal Reserve is All that Matters
Of late, we’re hearing various explanations for Wall Street’s rebound. Some are pointing to government stimulus (much more on that in a minute), the “flattening curve” of the coronavirus pandemic, and the many promises of soon-to-be hatched vaccines.
I would argue only one of those explanations makes sense, and that’s government stimulus. It’s ultimately provided by the Federal Reserve, which unbeknownst to most Americans is the creator of money.
The coronavirus curve may indeed be flattening, but both the total number of cases and deaths continues to rise steadily. And while there have been many promises of a vaccine, not only have there been no breakthroughs, but medical experts have been consistently warning it’s at least a year to a year and a half away. Victory celebrations seem premature at this point. This MarketWatch article confirms I’m hardly the only one who believes this.
No, the market isn’t rising because of anything connected with either progress with the virus or any economic developments. And given the slow but steady nature of the virus progression, and the reality of the still unraveling economic fallout, the so-called “V” shaped recovery seems to be more marketing spin than anything else.
But Wall Street is focusing neither on the coronavirus nor the economy. Instead, its focus is where it has been for the past 11 – or perhaps 20, or even 40 – years, and that’s on the actions of the Federal Reserve.
Wall Street’s primary concerns have little to do with the economy, certainly not the mainstream world most Americans inhabit. They’re mostly concerned with low interest rates and financial liquidity. Both flow – either directly or indirectly – from the Federal Reserve.
How the Federal Reserve Levitates the Stock Market
By keeping interest rates artificially low, the Fed channels investor funds into stocks seeking higher yields than what are available on safer, fixed income investments. Those rates have been hovering at zero or slightly above since the last recession in 2009. That, perhaps more than anything else, explains the “miraculous” longest bull market in history that’s occurred since.
But there’s also the all-important liquidity factor. The Fed stands ready at any time to pump money into the economy. They’ll do it on any sign of economic weakness or financial disturbance. They’ll bail out companies, entire industries, and even the federal government, any time any seem threatened.
Some believe this is the way it should be, but it really creates a false dynamic. Weakness in the economy is being covered by cash injections from the Fed, and have been for years. But the funding is targeted at large institutions, and not individuals. It enables failing organizations to continue in operation, while individuals struggle with stagnant wages and rising prices (which themselves are the result of that money printing).
That’s how we’ve arrived at this hollowed-out economy, something most of us understand even if we can’t describe it intelligently.
Wall Street has become very confident in this “the Fed has our back” approach. That confidence is not without merit. The money flows from the Fed go to the top, which mainly props up industries, large corporations, and the banks. It’s a reverse Robin Hood approach to the economy, in which the rich get richer, the poor get poorer, and the middle class stagnates or becomes poor.
None of that bothers the stock market. It isn’t rising on economic factors or optimism on the coronavirus front. Market moves are more about Federal Reserve actions, not the economy or the world situation.
Where Will Stocks Go From Here?
So, what does that mean to us as individuals, whether we’re invested in the stock market or not?
First, I think it’s safe to say we shouldn’t look at the performance of the stock market as an indication of what’s going on with the economy, and certainly not with the job market. Nor should we assume it foretells anything about the situation with the coronavirus. In the perverse way things work in modern finance, higher unemployment translates into lower costs for business. Wall Street sees that as a positive.
The darker side of that equation is that a person without a job can’t buy a company’s products or services. Why that’s less important than what’s happening on the expense/employment side is a complete mystery to me.
Second, we shouldn’t rely on the stock market for planning purposes. Whether the Dow is heading for 30,000, 40,000, or 50,000 – or will alternately plunge to 15,000, 10,000, or even something lower – will have little to do with what it is you’ll be doing for a living. The unfortunate reality of the coronavirus economic shutdown is that many of the jobs, businesses, and industries that existed before the virus are going to disappear permanently. That’s what we need to focus on.
When Too Much Optimism is a Dangerous Thing
Third, don’t be blinded by optimism. The gospel of the stock market is that it always rises, at least in the long term. But the reality of life is that troubles are a real thing. Being optimistic because Wall Street is rising may be counterproductive in your individual situation. Please see the Stockdale Paradox to get a better idea of how optimism can be counter-productive – or even lead to failure – in the face of a real crisis.
And fourth and finally, don’t be so trusting of the market. It may be predicting a bright future that isn’t in the cards. A lot of people may buy into the market now, or continue to buy-and-hold under the assumption of ever higher prices. But if reality finally asserts itself, there’s a real possibility the market can head in the opposite direction, and stay there for a very long time.
It’s almost predictable too, based not only on the building economic distress – that has yet to be fully reflected in the numbers – but perhaps more importantly by the denials of those who should know better.
Too much optimism in the face of grim realities like a pandemic and a building economic decline is a perfect recipe for a prolonged bear market. And an empty bank account.
I could be wrong, but I believe a lot of stock market optimists are going to lose a lot of money in the next few years.
With the reaction of the stock market to the coronavirus pandemic and the economic distress it’s causing, how much do you trust the market right now? Do you think this sudden upturn in stocks is signaling “all is suddenly well” – or a false flag hiding worse to come?