After six weeks of the unthinkable, economic rubble is high. We have lost 22 million jobs – of a base of 155 million employed Americans – bringing the unemployment rate to almost 15%. After accounting for the number of Gig economy jobs and extra income that is lost – the total damage is significantly higher. The downstream impact – the industries supporting the businesses that are in the eye of the storm – is hard to calculate. But undoubtedly there is additional damage. Many businesses are permanently impaired. These are some of the reasons for markets to be down and stay down.
But markets around the world are rebounding. How is that possible?
Here are the key reasons for the markets’ optimism. The Federal Reserve has a ‘do whatever it takes’ stance and has attacked lending weakness with lightning speed. Markets crave liquidity. The Fed cannot generate demand, but this is where Congress steps in. 2020 is an election year, and for the first time in history, both sides are on the same page and willing to bail out everyone. The $350 Billion Paycheck Protection Program is already out of money – and undoubtedly more is on the way. Unemployment payments are larger than most low-end salaries and might continue longer than the usual 4 months. Stimulus checks are already hitting bank accounts. There is enough short-term relief to hold the usual negative feedback loop at bay.
But the cause for real optimism stems from research labs. For the first time in history, the brightest minds and companies around the world are focused on solving one problem – COVID 19. Betting against human ingenuity has always been a losing proposition. Markets’ are banking on a solution - either a treatment or a vaccine - to arrive much earlier than the usual timeframe. That would be a true game-changer on the way back to the old normal.
Over the years, I have learned the hard way that the market is not the economy. In times of chaos, even I need a reminder. Here is a link to 10 Reasons Why the Stock Market Is not the Economy if you need a refresher. The reopening is akin to walking a difficult tight rope, which will bring a set of challenges as well as opportunities. As investors, we need to stay open to this new world - instead of being anchored into a positive or negative position. Markets are an iceberg, and there is considerably more information underneath the surface than at face value. Understanding the direction of interest rates has been critical and we are closing in on another inflection point. The next few weeks hold the key in determining if this is a fleeting rebound or a sustainable one.
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This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund. These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described. These forward-looking statements will not be updated in future.
I am an investor and these are my personal thoughts on investing, behavioral finance, markets, and sports viewed through the prism of a Latticework