Daily Global Perspectives

Eye popping returns for the second quarter of 2020 are tempered only by an understanding that it has been but a smidgeon over two months. As of Wednesday’s close the markets I follow were led by mid-cap equities, as measured by the iShares Core S&P Mid-Cap ETF, with a blowout 28.53% gain quarter-to-date. They were followed by the iShares Core S&P Small-Cap ETF at 24.65%, and the good old iShares Core S&P 500 ETF at 21.28%. The laggard iShares Global REIT ETF was up only a “dismal” 15.25%.

The good news is America is reopening, but there is a lot of bad news too — for example, these points from the May U.S. ISM manufacturing report:

1. The manufacturing index rose to 43.1 from an 11-year low of 41.5 in April, compared to an all-time low of 30.3 in June 1980
2. The jobs index rose to 32.1 from a 71-year low of 27.5 in April, compared to an all-time low of 27.2 in June 1949
3. New orders rose to 31.8 from an 11-year low of 27.1 in April, compared to an all-time low of 24.2 in June 1980

Expect more bad news in Friday’s nonfarm payrolls report: the unemployment rate is likely to surpass 17%.

The investment adage, “stay the course,” means don’t sell during bear markets because the markets will come back — they always do, right? Implicit in staying the course is the presumption from recent experience that government policies will “rescue” markets; in effect, bailing out losing positions. With three of the worst bear markets in history happening in a short, 20-year period, I think this may be a dangerous presumption.

The astounding run last week of small-cap and mid-cap equities, 8.77% and 7.36%, respectively, was the footrace to watch leading up to Memorial Day 2020. Therefore, it was a sight to behold yesterday’s sprint to the finish, as small-caps and mid-caps notched another 4.02% and 3.40%, respectively. It looks like fear of loss has been replaced by fear of missing out (FOMO).

Memorial Day commemorates the men and women who died while in the military service of their country, particularly those who died in battle, or as a result of wounds sustained in battle. In other words, the purpose of Memorial Day is to memorialize the Veterans who made the ultimate sacrifice for their country.  We spend time remembering those who lost their lives and could not come home, reflecting on what their service means for us now; that we have the luxuries and freedoms we enjoy today. Memorial Day is also a reminder for us all to consider how we can support and safeguard their grieving families and loved ones who are left behind.

All it took was good news on progress with an early-trial COVID-19 vaccine, and the market simply exploded. There is a loose connection here since almost any good news would have turned the markets into a gusher, especially in beaten-up small-cap equity and REITs. In fact, the S&P 600 Small Cap Index was up over 7% on Monday, a sector with so much dry tinder that the slightest catalyst was bound to light it on fire. Talk about gushers, didn’t WTI oil have a $10-handle two weeks ago and recently breached $32 per barrel? Blink and the markets change. There is another adage afoot here; "Don't Fight the Fed".

Last month’s retail sales plummeted -16.4%, even worse than the expected -12.3%. This was a record plunge as the economy continues to be shut down. Through all of this we know that travel, leisure and restaurants have been getting crushed; but worst hit in April were clothing sales, down by 78.8%. Continuing unemployment claims are now at 22.8 million, an incomprehensible number. Federal Reserve Chairman Powell had a grim forecast on Wednesday, saying “There is a growing sense that the recovery may come more slowly than we would like.”

It is important to record history as it is playing out, because years from now it may be just, well, unbelievable. U.S. CPI dropped 0.8% in April, while the core CPI rate slid 0.4%, a record low with data going back to 1947. Another “inflation” indicator also was negative as April PPI reported a decline of 1.3%, a new record. These are “deflation” recordings, and deflation is associated with depression. It is imperative to get the economy back up to speed; the “law of unintended consequences” is at play, which in my view means that the United States is trading one bad outcome for another.

Wall Street is confusing to most people in normal times, but when the unemployment rate skyrockets to 14.7% — the highest rate since the 1940s — and the market jumps up, well, that is just nonsensical.

April 2020 will be a month for the history books, shattering records for the depth and breadth of its explosive market rally.