For Immediate Release
Chicago, IL – May 11, 2020 – Today, Zacks Investment Ideas feature highlights Features: Amazon (AMZN - Free Report) , Microsoft (MSFT - Free Report) , Walmart (WMT - Free Report) , Costco (COST - Free Report) and Home Depot (HD - Free Report) .
Should We Remain Bullish in the Face of an Economic Crisis?
There appears to be a disconnect between the equity markets and what is happening in our economy. Unemployment claims are surging by the millions every week, and a 14.7% unemployment was just reported for April, which represents the highest level since the Great Depression. At the same time, the S&P 500 has surged over 30% from the March lows, and the tech-driven Nasdaq index is actually up for the year.
What Is Causing The Disconnect?
The most common explanation for your typical equity market disconnect from broader economic conditions is that equities tend to be a leading indicator, which means that stocks react before the broader economy. Investors have discounted 2020 earnings and are looking towards 2021 & beyond.
The Federal Reserve’s unprecedentedly dovish position has also propped up the asset markets and set up well-capitalized businesses to come out of this recession stronger than ever (if inflation doesn’t become an issue).
The pandemic is having a disproportionate impact on industries. Retail, airlines, and Main Street businesses have borne the lions share of the economic pain, while tech and health have thrived.
Main Street is getting crushed by the state quarantines, and the government is attempting to keep them and their employees afloat with the paycheck protection program (PPP). Still, this isn’t enough with workers getting laid off by the millions every week. Many local restaurants and bars are going to go under, and some analysts are speculating that only the chains will survive.
The biggest point I wanted to make here was that the businesses that are getting hit the hardest are the ones that aren’t on the public exchanges. Main Street businesses don’t have the same bank relationships that publicly traded companies do, so they aren’t provided with the same level of liquidity. The stock market doesn’t reflect the whole economy, and the side it doesn’t show is the one suffering the most.
Companies like Amazon, Microsoft, Walmart, Costco and Home Depot have all benefited from this pandemic at the expense of Main Street. As more small businesses fail, the more market share these well-positioned retail giants will gain.
Can The Equity Rally Continue?
The biggest issue that I see with the current disconnected is the massive level of unemployment that the market appears to be neglecting. During the financial crisis, the unemployment level peaked at around 10%. Today we are sitting at 14.7% unemployment and analysts warn that it may reach 25%+ by this summer, which could incite depression-like conditions.
Already we are looking at 33.5 million filings in the past 7 weeks, which is more than 20% of the US working population. Luckily, our federal government has provided extend unemployment benefits of an additional $600 per week, but how long can this be afforded?
It is going to be years before employment recovers if it ever does. Unemployment peak in 2010 during the financial crisis, and it took more than 5 years after that to return to pre-crisis levels. How long will it take the US to get back from 25%+ unemployment? Maybe decades.
All I know is that the US government cannot fund our economy forever without significant repercussions, which could include a sizeable raise in taxes and/or hyperinflation.
What I am Doing
So can this rally continue? The fundamentals say no, but I have learned not to fight the Fed. The markets are in limbo right now, just waiting for a catalyzer in the form of state reopening’s, more government funding or worst-case scenario, another wave of the pandemic.
I’m sitting with cash right now, waiting for fundamentals to start adding up. I don’t think we will retest the lows we hit in March because of the Fed’s ‘unlimited QE’ backstop, but I think we are due for a pullback. I am looking for an S&P 500 level of 2,650 before I start putting more into equities.
The disconnect between the markets and the economy makes more sense the more you examine it, but that doesn’t mean that the rally since late March is entirely justified. I think we have come up too much too fast, and we are bound to see a pullback as the impact of this health crisis unfolds.
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