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Are The Markets Disconnected From Reality or Ahead of It?

For most people looking at the stock market it's hard to understand how the US stock markets keeps trending up when -as of this week - almost 40 million people, that is 1 in every 5 people in the USA are now claiming unemployment. It's hard to comprehend. 40 million people is almost 73% of the entire population of England or 4x the entire population of Switzerland.

Yet, the US stock markets -the DOW, the Nasdaq and so forth - keep trending up. Is the economy going to be back to normal in 6 months time? Are 90% of the population who are claiming unemployment going to be back at work in 6 months time? Are we going to have an approved successful vaccine in 6 months time that has been distributed to 350 million people in the USA? And if a vaccine is not ready or still in the process of being proven out, is the coronavirus going to disappear in the winter of 2020/2021? You will be hard-pressed to find a virologist in the USA that is not saying that it is inevitable that the coronavirus will re-surface in the winter of 2020 and that is even if it recedes during the summer which is not necessarily the case on a regional level, where patchworks of outbreaks will vary regionally as the virus migrates as it will with passage made easier in states with looser restrictions.

Is the massive government and fed stimulus enough to prop everything up indefinitely. There will be more. It may take time for the next round to be passed by the house and senate but the commitment to do so, if it is necessary, is there.

How will consumers respond in the coming months? How will retailers fare? How will restaurants, the travel and entertainment industries fare? What about commercial real estate? We can go on. Social distancing means less customers per square foot and inevitably less revenue. This will impact smaller businesses and larger businesses alike. For the millions of restaurants, for example, the delivery portals such as GrubHub or DoorDash are eating into restaurants margins taking up to 30% off the top revenue line. Some restaurants are asking their customers to order direct to help them stay in business.

There are still many uncertainties and unknowns. Despite this, the market is fuelled by hope and expectations of a swift recovery and an unlimited backstop of support by the Federal Reserve and US Government. The Federal Reserve chairman, Jerome Powell, does not appear to be as hopeful as the markets. He has made it clear that there is a high degree of uncertainty and that the government and federal reserve must be prepared to continue to step up to the plate or risk severe harm to the economy.  In his own comments he fails to take into account the medical experts views that the resurfacing of the coronavirus in the Fall and Winter of 2020 is inevitable. We should again add that the severity of the coronavirus cannot be measured in aggregate within the USA. One must look at the US regionally, by state and city. The pandemic is operative in a patchwork of ecosystems and without efficient contact tracing and testing will continue to migrate in its own way with the help of a mixed framework of state and federal organization actions and confusing CDC rules.

While the younger sub-40 age groups that do not have any other serious health issues may feel relatively unconcerned, even if they do catch the coronavirus, the over 40 demographic has to exercize greater care. The reality however is that the percentage of the US population with diabetes, heart or pulminary issues or who are smokers is a significant size. America has the largest outbreak of coronavirus worldwide with the most deaths to date. There are many reasons for this.

Back to the stock markets. With so many uncertainties and a growing number of bankruptcies and more to come, the question is how long can the USA weather the storm and at what cost. How are the 40 million unemployed going to get back into the work-force and in what timeframe? With so many unemployed, how long can they continue to pay their rent or their mortgage?

Unlike in Germany where the government simply guarranteed up to 80% of workers salaries - a common sense move that guarrantees financial stability and jobs - the US has provided a patchwork of remedies that puts small businesses, employees and (by default) families in a very challenged and even conflicting situation. There is a lot of support in the congress to do something along the lines of what has been done in Germany but there is significant opposition as well.

If an approved vaccine does appear at every persons local health service by October 2020, then the stock markets actions may well be justified. The economy can begin to get back on its feet without the coronavirus impeding it. However, if a vaccine does not materialize on everyone's doorstep by the end of 2020, the uncertainties ahead alongside rising trade tensions with China will mean that the markets will need to adjust their outlook and expectations. The discovery of one or more successful vaccines will be a huge accomplishment, but the logistics to manufacture and distribute these on an unprecedented scale will be an equal logistical achievement. Almost everything will have to proceed perfectly for this to be accomplished within the next 5 months. And, how often does this happen in the world of scientific drug discovery, manufacturing and distribution?

There are in our view more risks to the downside at this point in time than to the upside in the short-term. Long term we are confident that the markets will prevail. The time it will take in-between is the unknown.








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