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 It looks like fear of loss has been replaced by fear of missing out (FOMO).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.
The Trump administration announced a three-phase plan for “Opening Up America Again” Thursday evening. In a brief document the administration lays out its plans for reopening the economy, which it expects to begin doing this month. Coincident with the announcement, not necessarily a result of it, stock market futures surged upward more than 3%. Good news indeed, but Thursday also delivered a storm of crushing economic data.
Have you noticed that the doom and gloom is ebbing? The talk now is of forming regional and national committees to “open up” the economy. In my view, we have hit an inflection point, which is a term in calculus — and you thought taking that course was a waste of time — where the curve changes direction, in this case from negative to positive. Think of this point as at the bottom of a “U-shape,” but on the way up. The linchpin of this inflection point is that the horrible impact from COVID-19 has begun to flatten and is diminishing in the worst “hotspots.”