This week's blog is inspired by all time best historical novel by Charles Dickens "A Tale of Two Cities" which is set between London and Paris during late 19th century. Dickens' opening sentence (source Wikipedia) below could be as applicable in today's historical time of world-wide pandemic!
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us......"
Last 6 weeks had shown the big disconnect between two streets - Main Street (Economy) and Wall Street (Markets). So let's look at some aspects of "Tale of Two Streets" with focus on US but is equally applicable to almost any country in the world.
Main Street:
- Over 30 Million unemployment claims in last 5 weeks. That's nearly 10 times of what happened just after world war II ended in 1945
- It took 11 years to create over 22 million jobs since great recession of 2008-09. It took 6 weeks to lose 30 million jobs
- Unemployment report which would come out this Friday would see highest unemployment rate of between 12-20%. The economy went from best unemployment in 5 decades (3.5%) to worst unemployment in 90 years (since great depression)
- Q1 GDP went from forecast of plus 2-3% to close to minus 5% in matter of weeks.
- Q2 GDP could be down by more than 25% - highest since great depression
- Major parts of economy is shut down across the nation (and world). Even during pandemic of Spanish Flu, this had not happened. That may be due to lack of information and global connectivity and may have caused 50 million death. This time policy makers were more informed and willing to shut the nations to save lives which is absolutely correct policy. As Modiji said "Jaan Hai to Jahan Hai" while imposing lockdown in India!
Wall Street:
- DOW had its best month since 1987 with double-digit gains. Same was applicable for S&P and Nasdaq
- Since Mar 23 lows, indexes are up by more 25%
- The worst performing sectors like Energy, transportations, leisure (many of these businesses are still closed) are up by 50-100% from their lows.
- The bear market lasted only for 3 weeks (Mar 9 to end of March) and possibly a new bull market had already started
- The tech stalwarts (like Amazon) are at or near all time highs in the most severe recession.
So one would wonder why there is so much disconnect between these two "streets"?
As Paul Krugman wrote in his opinion article "Crashing Economy, Rising Stocks"
The Stock Market is not The Economy
But there is some logic to why markets are behaving this way. Here is my take on this.
- US FED: Most important factor is US Federal Reserve Bank's extra-ordinary, out-of-box, proactive and creative steps to support the economy (and indirectly markets). This time Fed is going all out without worrying about "moral hazard" since there is no sector/companies/humans (at least in US) to blame for this crisis (unlike dot.com companies during 2001 and financial companies during 08-09). These steps of effectively providing backstop to even junk-rated companies unfroze the credit markets and companies like Carnival to Boeing could raise billions of $$ in debt to survive and live to see another day! Markets know the saying 'Don't Fight the Fed" or "Fed is on your side" and reacting to these steps
- US Fiscal Stimulus: US Government (both houses of congress and White House) kept aside their differences as well as ideology and passed multiple rounds of stimulus totaling nearly $2.8 trillion and counting. And this was done at warp-speed and almost unanimously. More would come as the ravages of lockdowns spread throughout the economy in Q2. No other country had moved so fast to protect its economy and citizens from perils of economic pain
- American Magic: As Warren Buffet (always the optimist which is what I liked about him) said that America will come back stronger and wealthier over longer run and equities are best way to participate in the rebound
- TINA and FOMO: "There is No Alternative" and "Fear of Missing Out". In ultra-low to negative interest rate world, there are no other alternatives to put your money to work especially if some sound and safe companies (AT&T, Verizon, Exxon, Apple and so on) are paying more than 5-10 times yield compared to 10-year treasuries. And coming to FOMO, the sectors which have gone up significantly over last 6 weeks (e.g. Energy, Banks and Transportations/leisure) are still down significantly if you compare their stock prices just 3 months back. So the folks who are daring enough to look at world beyond pandemic are making the bets investing in these sectors because such opportunities come once in a decade!
That sums up why we are seeing the great disconnect between two streets!
(and I just added "Tale of Two Cities" on my reading list)
/Shyam
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