This has to be the most maligned stock market rally of all time.
It’s been called crazy, irrational, even stupid.
Analysts and economists say it proves just how out of touch stock markets are with the economy.
And yet stocks have been climbing since their March lows. Wait — rocketing up since their March lows. Wait — making the fastest 30 and 40% gains after a bear pullback – in the history of the U.S. markets.
Despite bad job report after bad job report, not to mention nationwide protests and potential signs that COVID-19 is making a comeback in multiple states, stocks have kept on going.
In fact, this week the Nasdaq has made new all-time highs.
Pundits are baffled. The News Media barely mentions it except to say it’s nonsensical.
They see the economy as being in dire straits. Unemployment is now well into double-digits (more on that in a moment), which pushes down consumer spending. Factories have been closed and shipping is on hold, meaning that even if consumers had money to spend, there’d be nothing for them to buy.
And most companies are showing massive revenue hits for March through May.
Under that view, surging stocks really don’t make sense. We’re reliving the Financial Crisis, they think, so stock markets should keep falling.
Except we’re not reliving the Financial Crisis, of course.
This pandemic downturn is different in almost every single way.
And that’s why economists stuck in the past keep getting it wrong.
Here’s what they’re not getting…
Not Everything is Like 2008
The Financial Crisis had effects on almost every level of finance. The most visible consequence may have been the bursting of the housing bubble and the disappearance of the “Lehman Brothers” name, but the crisis changed much more.
For one, the Financial Crisis became the benchmark for every downturn since. Throughout the European debt crisis, the Asian SARS downturn in 2002, and the U.S. debt downgrade in 2012, we were all at least safe in knowing that it wouldn’t get as bad as the Financial Crisis.
This year is the first time since 2007 that economists and analysts have been almost unanimous in saying that things could get worse than they did then.
It’s easy to see why. After all, during the Financial Crisis, the stock market started falling in late 2007, and didn’t bottom out until 2009.
Meanwhile, starting on February 19, 2020, U.S. stock markets plunged 30% in just 22 trading days. That’s the fastest bear market in history.
That’s one day faster than the previous record-holder, the 30% plunge in 1934. Numbers three and four also happened during the Great Depression, in 1931 and 1929. In other words, in February the stock market didn’t just react as if the coronavirus was worse than the Financial Crisis…
It plunged as if the pandemic was worse than the Great Depression.
Combine that with record-high layoffs, factory shutdowns, halted shipping, and closed businesses, and economists got stuck on one track – fitting our current downturn into the mold of the years-long Financial Crisis.
They’re still stuck there today, calling this bull market rally a mistake.
But there’s another explanation.
It may be that the markets were right all along, and it’s the so-called experts who made the mistake…
Some Downturns Resolve Much Faster
Cyclical recessions, like the Financial Crisis, take years to work through the system, and even longer to recover.
But if that happened to every community hit by catastrophe, we’d still be living in the Middle Ages. After all, towns and cities get hit by disaster all the time.
Hurricanes, tornadoes, floods, earthquakes, droughts – you name it. These are tragic and horrifying events that can put a stop to millions of workers and businesses.
But once they are over, economic activity can return pretty quickly.
Take Hurricane Andrew, for example. In August, 1992, it hit Miami-Dade County in Florida, destroying 26,000 homes and forcing 160,000 people out. The Homestead Air Force Base, one of the key employers in the Miami area, was out of commission for two years.
And yet Miami-Dade County’s employment numbers only dipped for a month.
Or take the 1994 earthquake in Northridge, California, which destroyed the highways used by hundreds of thousands of commuters daily.
But looking at job growth in the region, you couldn’t even tell.
Even the horrific 9/11 terrorist attacks only increased unemployment in New York City for about 12 months before they numbers got back on track.
The one exception is Hurricane Katrina, which hit New Orleans in 2005. It’s the costliest natural disaster in U.S. history, flooded 80% of the city, and forced 750,000 people to leave. Many never came back, and the city’s reconstruction was hampered by underfunding and mismanagement, which is why New Orleans never fully recovered.
But even so, people got back to work almost immediately after the hurricane, and employment started growing fast.
With these quick recoveries in mind, last week’s surprise job growth makes a lot more sense.
Economists were expecting the Labor Department to announce millions of more job losses, because they think we’re reliving the Financial Crisis all over again.
Instead, the Labor Department announced that 2.5 million people had gotten jobs.
That’s exactly what you’d expect after a natural disaster, not after a cyclical recession.
Since the number came out, it’s clear that the Bureau of Labor Statistics (BLS) has had a huge systemic problem with the surveys used to generate the non-farm payroll number. I predicted this error in our Weekend Update video – before the news broke. But even with that huge mistake, the number (that won’t be revised for bureaucratic reasons) of unemployed people was much better than expected.
It’s no doubt a great sign for our recovery.
But it also suggests that the stock market may have been right all along.
Remember, when traders and investors sent markets plunging in February, no one really knew much about the virus.
Reports from China were sketchy at best, and the official numbers out of there were unreliable. Given how harsh the Wuhan lockdown appeared to be, people feared the worst.
Traders and investors started selling everything. Americans stopped going out all across the country, in most states before lockdowns were put in place. The economy ground to a halt as everyone waited for the storm to hit.
And it’s been horrible, no doubt about it. As I’m writing this, more than 114,000 people have lost their lives to COVID-19 in the U.S.
That is an unimaginable tragedy.
But it’s not the apocalyptic scenario that traders were afraid of. We haven’t seen nearly the amount of bankruptcies that analysts expected. Banks appear to have weathered this crisis without any major problems.
Instead of huge shift in the economy of the country like we saw in 2007-2009 (and beyond), this downturn looks more like everyone sheltering from a hurricane or tornado passing through the country.
Indeed, it seems that the market is pricing in a faster “return to near normal” than economists could envision. This will happen when people can largely get back to doing what they did before even if they have to take additional virus safety precautions while doing so.
It may be that markets were right to predict this, while economists were too stuck in 2008 to realize this downturn was different.
We’re Not Out of the Woods Yet
Now, to be clear, we’re still far from a recovery.
On Tuesday, ten different states in the U.S. had their highest number of COVID-19 hospitalizations yet. And certainly the employment numbers are not as sanguine as the BLS numbers would have us believe, with the April unemployment number now looking more like 19.5% and the May number at 16.1 instead of the 13.3 officially reported.
Longer term, millions of Americans will struggle to find work even if we recover 90% of the jobs we’ve lost.
But people getting back to work and getting money in their pockets is good. 60% of the U.S. economy is now powered by consumers, so getting that money flowing again will kick-start the economy. Trillions in Fed stimulus is helping a little bit in filling the gap of missing consumer spending.
Now, that doesn’t mean everything we’re seeing in the stock market makes sense.
There’s clearly been a “dash for trash.” Everything is going up, and the more a stock was beaten down, the quicker it’s rising.
That’s made airlines and cruise lines some of the fastest-rising stocks over the past few weeks. There’s going to have to be a reckoning here at some point. Just yesterday, the International Air Transport Association, the organization of the world’s airlines, released a report that concluded “Financially, 2020 will go down as the worst year in the history of aviation.”
The industry sees revenues down more than 50% this year, with about $84 billion lost. And they don’t think they’ll recover until 2022 at the earliest.
Cruise lines are likely to face similar issues.
Until it becomes clearer whether we’re in for a drawn-out recovery like after 2008, or a quick one like the ones that follow natural disasters, I recommend you stay away from travel stocks.
I believe that better value can be found in companies that have had pent up demand that can be fulfilled more quickly than it will take the travel industry to recover. I like industries like semiconductors, where pent up demand and the new work-from-home-and-office will continue to require new and/or updated equipment for individuals and the cloud.
This morning, the Dark Edge Project team reeled in a 100% gain in Advanced Micro Devices (AMD) calls in less than six trading days – the fifth 100% profit subscribers have had the chance to cash in on since the start of last week. We added calls on another lesser known chip company to the portfolio as well. Click here to learn exactly how I’m able to help them reel in so many huge profits in such a short timeframe.
Great trading, stay safe out there, and God bless you,
D.R. Barton, Jr.