Officially, COVID-19 has caused a recession, and this post will provide a market update for 6/19/20. We have to remember one thing about recessions, and that is that all of them take time to recover from.
Something that COVID-19 has also shown us that the stock market and the economy are not always in sync. As stated previously, an end of a recession and a full economic recovery are two different things. The economy may look like it bounces back quickly, but it could take years to repair the damage done entirely.
While the markets have shown the power of optimism from the opening of the economy, the underlying economy has been slower. Take, for example, retail that has jumped up almost 18% in May, which is the most significant rise on record. The total dollar amount though, is the lowest it’s been since August 2017.
Overall the market is at 2019 highs, but the earnings are almost half of what they were then. Interesting for prospective, right.
Time to assess what is going on with the country and world to see if we are in store for a second crash in 2020. The US has over 2.1 million infections since the beginning of the outbreak and over 117,000 deaths. Brazil has overtaken the US for the country with the most new daily infections. Infection rates in India, Mexico, Peru, and Chile are continuing to rise.
New infections in the US are showing at least to me that they were declining but with the states reopening the downward trend seems to be bottoming. The risk here is if the infection spikes a second time forcing another shutdown situation it would be disastrous for businesses.
The south and west of the US are experiencing a significant rise in infections. Many of these states are approaching levels of infection growth that have experts saying stay at home orders should be considered. After the last shutdown, many of the politicians are hesitant to shut down life again as it would be very unpopular and hurt businesses.
Concerning the markets is that Apple is closing stores in Arizona, Florida, North Carolina, and South Carolina, which are experiencing significant infection increases. The fact that corporations are deciding to close since politicians are not willing to points to the severity of the states.
The last part to consider is that the vaccines, while many are underway and making significant progress, they are still months away from being ready to roll out.
Jeremy Grantham, who is a stock-market legend, who called three financial bubbles, says this one is the ‘Real McCoy,’ this is ‘crazy stuff.’ He stated that his confidence is rising quite rapidly, that this is becoming the fourth bubble of his investment career. The big bubbles can go on for an extended period and cause a lot of pain. The positive he believes is that we at least know now that we’re in a big bubble.
The Federal Reserve was so concerned about the ability of companies to have access to funding that they began buying corporate bonds. They originally started buying the corporate bonds through ETFs from BlackRock, but they are moving away from ETFs to buying directly from the corporations and create their index.
Part of what makes this market hard to figure out is that the Fed had propelled the S&P 500 up 40% since March 23, when the Fed announced its unprecedented experiment with buying junk bonds. This surge shows the disconnect as the market rises while we face the collapse of the real economy.
Another new problem is that banks are running out of money. The coronavirus pandemic has created another crisis for the U.S. economy: a coin shortage. With no one exchanging cash since we all have been home, banks have been a record low levels of coins, which could cause panic from loss of trust in banks if they run out of real money. The Fed testified to Congress about this issue and are taking action to resolve it.
Last week on 6/11, it was reported that 1.5 million people have filed for unemployment benefits. That brings the 13 week total to more than 45 million. While the claims have been declining for the 11th week in a row, economists are still trying to figure out why so many people are still unemployed and are concerned that the labor market is not rebounding as fast as expected.
While the market has pushed close to record highs, company earnings, on the other hand, have dropped for the majority of the companies. The market has risen from three things.
First is the hope of a V-shaped recovery and a quick rebound. The problem with that theory is that even if the companies have revenues bounce back, they have taken on massive amounts of debt, which will weigh on earnings.
The second issue is the Robinhood investors that are buying and speculating on any stock regardless of fundamentals. Lots of money has been lost and made from millions of users hoping to get rich quick. The rise of the small investor has made the “dumb” money drive the direction of the market.
The third issue is the Fed buying policy. While it is needed to keep the economy moving forward but the problem is that since the Fed is buying junk bonds, it has created participation awards for everyone as no one will lose while the Fed is buying bonds as they are keeping companies afloat. This seems like an extraordinary situation, but this is creating a massive bubble as everything can go up forever.
My feeling is that while none of us can predict the future, I fear that we may have a market downturn in the next 1-3 months. With that said, I believe that making a buy list is the most important thing for an investor to do right now.
I am building my list, which I will share with you as well as getting in a position to make a large investment if the market tanks again. At the end of each month, I will also continue to review my stock investments.
This post is my opinion, which is strictly for information & educational purposes only. The post is not intended to provide any investment advice. Please seek your own duly licensed professional for investment advice as they will be able to consider your situation. Please read my Terms & Conditions Page for a full disclaimer.