There is always a narrative that drives the stock market, and sometimes more than one. These narratives come and go, and often the correlation with reality proves weak. In 2015 the markets were disturbed by falling oil prices and the associated fear that Persian Gulf countries would default on their debts, leading to a worldwide financial crisis; the trauma of 2008 had not been forgotten.
In the event, the result of falling oil prices was simply cheaper oil. But the stock market was exciting for a few months, despite the fact that there was little risk to the banks.
Today the market is relatively calm in the face of low oil prices, and is completely untroubled by a possible banking crisis. And this despite the fact that oil companies and banks face a much more challenging environment than in 2015. (I am writing on May 15, 2020.)
In a recent interview with Fox News, Jared Kushner presented an optimistic narrative; he indicated the economy would be normal by June and “rocking by July,” by which he means that prosperity is just around the corner
“Rocking by July” is one of two competing narratives in today’s stock market, and the other we’ll call the “Screwed until there’s a Vaccine” narrative. These two have roughly equal levels of support.
Jared’s vision is an economy returning to normal soon, certainly before the November election. July 4 is a mere seven weeks away, and our unemployment rate is what? According the Bureau of Labor Statistics, it’s 14.7%; but 36 million Americans have filed for unemployment compensation, and there were 158 million employed in 2019—which seems like a 22.8% unemployment rate, without even counting the 3% rate we had before the pandemic.
https://www.nytimes.com/2020/05/14/business/economy/coronavirus-unemployment-claims.html
https://www.statista.com/statistics/269959/employment-in-the-united-states/
Whatever the exact unemployment rate, it’s huge and growing. The economy cannot possibly return to normal until the unemployment rate at least stabilizes. However, the “Rocking by July” narrative has its adherents; people continue to buy stocks, and the market has recovered about 60% of its losses since late March.
Why is that happening? There are a couple of obvious reasons. First, stocks are cheap. If you shake me awake in the middle of the night and tell me that Southwest Airlines is trading at 24 then I will croak “Buy! Buy! Buy!” before falling back asleep. I won’t ask why it’s trading so low. In the clear light of day, with all the information at my fingertips, I might have doubts—but cheap is cheap. I have to think it through carefully to not buy Southwest at that price.
Second, bonds, CDs and real estate are all problematic right now. Bonds are yielding very little—and the possibility of mass defaults cannot be ignored, although people are ignoring it as I write. (Granted, the Federal Reserve is on this problem.) CDs are low-risk, but yield little, and who can tell what’s going to happen with real estate? For now, the market is not being kind to REITs.
So there aren’t many other good investment opportunities. There’s gold, but that’s already gone up a lot. There are other commodities, but there’s some deflation in the economy already, and there’s frankly nothing I would buy right now. Other investors seem to feel similarly.
So stocks are kinda the only game in town.
Investors are to some extent forced by circumstances to believe in—or hope for—“Rocking by July.” Jared Kushner is now our spiritual and intellectual leader. If you’re staring ruin in the face, and an utterly clueless man tells you there’s still hope, then despite yourself you might think, even a stopped watch is right twice a day.
But these are vain hopes. Jared Kushner’s winning optimism notwithstanding, the “Screwed until there’s a Vaccine” narrative is supported by this undeniable and brutal truth: the economy will not begin to recover significantly until the corona-virus has largely disappeared. And even then the recovery will probably be slow.
Major sectors of the economy have been badly damaged: airlines, retail sales, food processing, restaurants and entertainment, manufacturing, tourism, farming (supply chains), energy, education and daycare centers, and probably the medical sector, particularly hospitals. Banking and insurance cannot be far behind. State and local governments are also on shaky ground. Big pharma and software may be okay, and financial markets will probably stay liquid.
Some of these sectors may never recover, and others may undergo drastic re-structuring—and that means capital investments and possible permanent job losses.
Also, an unemployment rate of 15%-26% means that much less productivity, and consumer demand will decline more than that. There are already signs of deflation:
The above quotes are from schwab.com, 5-14-2020 and 5-15-2020, Trade->Trade Source->Markets
Merely lifting the stay-at-home orders will mean little to the economy. Those orders are meant for the 10% to 20% of the population who won’t read or understand the advice of public health officials. The other 80% to 90% will continue to behave as if there is a deadly disease on the loose which the federal government isn’t doing much to stop. Yes, it’s possible that the Trump administration will try to force some of that 80% to 90% back to work, but by and large the workers will go back when they think it’s safe. Trump’s executive order to meat-packing workers to return to their jobs seems to have been widely ignored.
And even if they could be forced to work, they can’t be forced to shop—or take vacations.
But for many American workers, forcing them to return to their jobs is moot, because they have no jobs. Let’s look at the unemployment claims:
https://www.nytimes.com/2020/05/14/business/economy/coronavirus-unemployment-claims.html
If you extrapolate the unemployment claim curve assuming it keeps the same shape (it might well not), then it appears that new jobless claims will return to 2019 levels in July or August. At that point, unemployment should level off; how fast it decreases depends mostly on how soon we get a vaccine, although more government stimulus wouldn’t hurt.
And if you remember a bit of integral calculus, you can guessestimate total unemployment claims at 45 to 50 million, or about 30% of the people working in January. Again, that’s assuming the curve doesn’t change shape….and one thing that could change the curve is if states and local governments start laying off employees, as they did during the Great Recession.
And if the unemployment rate won’t decrease much until we start administering the vaccine—and that’s my view—then we could have an unemployment rate of 15%-26% until late in 2021. A truly massive government stimulus could change this picture, but unless the Democrats win the election that seems unlikely.
And then there’s the question of the efficacy of the vaccine, and whether the population will accept it. Will the corona-virus mutate into a family of viruses, each requiring its own sub-vaccine, like the flu?
And beyond the usual anti-vaxxers, what about the people the Republicans have convinced that covid-19 is no worse than the flu? If they don’t get the flu shot today, why should they get the corona-virus shot tomorrow?
In the flu season of 2017-2018, 37.1% of adults got the flu shot. Yes, I would expect that more would get the covid-19 vaccine, but will we get enough to eliminate or nearly eliminate the virus? We might need 80% to 90% compliance; will we get that after all the attacks on the credibility of science and experts?
https://www.cdc.gov/flu/fluvaxview/coverage-1718estimates.htm
Even a good vaccine may not be enough to save the economy.
P.S. Just because Jared Kushner is almost certainly wrong about the economy doesn’t mean that now is a bad time to invest in the stock market. The economy and the stock market do not often march in step. I did in fact buy Southwest Airlines—fingers crossed.
The Socialist Investor 