Sugar High and Then What?
I cannot remember a time when I’ve seen such widespread disparity between what is happening in the economy and what is happening in the stock market.
We have record layoffs. In a single month, nearly all of the jobs created after the financial crisis disappeared, at least temporarily.
The number of first-time claims for unemployment insurance has topped 45 million. Nearly one in four working Americans has lost a job. Given the devastation among weaker companies, it has been estimated that 10-15 million jobs will be lost permanently.
If there is any good news, it is that the number of first-time filings has been declining, and the number of individuals who file on a regular basis in order to receive jobless benefits is about half the number of first-time filings.
In spite of this, the broader-based S&P 500 Index has already eclipsed 3,100, rebounding over 39% and the tech-heavy NASDAQ Composite has added more than 46%, rising to an all-time high above 10,000.
Economic activity has fallen with depression-like speed, but the major averages have staged an impressive rally. The adage “stocks climb a wall of worry” has never been more appropriate than now amid economic devastation and an outlook that remains incredibly murky.
Major stock market index levels represent the collective wisdom of tens of millions of stock market investors. They are not simply an opinion, but an opinion with money behind it.
When stocks were in a free fall in March, investors were anticipating a devastating blow to the economy. Tragically, reality did not disappoint.
More recent data indicating that workers are returning to their jobs appears encouraging, but needs to be viewed in perspective. It is reasonable to expect that a majority of laid-off workers will return to their jobs. The problem, however, is the likelihood that an estimated 10% of the workforce will be permanently unemployed. That’s nearly triple the unemployment level prevailing at the beginning of this year.
Although the market’s short-term reaction to news of people returning to work was enthusiastic, it seems inevitable that the reality of mass unemployment will temper that early response.
The sheer number of unemployed people will have a substantial impact on consumer spending, but it is likely that this shortfall will be more than offset by the return of spending for travel, restaurants, professional sports, and musical events. Funds that are being held back today will be spent as life returns to a new normal.
Even in the best of times, economic forecasting is difficult. Today, the outlook is clouded with an even greater degree of uncertainty.
Don’t expect a return to the pre-COVID jobless rate anytime soon. But investors are betting that an economic bottom is in sight. The more pressing concern is how long it will take for U.S. business to recover fully and move to new high ground.
Although there will certainly be companies that prosper and grow without missing a beat, they will be the exception, not the rule.
N. Russell Wayne, CFP®