I rarely write on current events unless they have long term ramifications. The first rule of blogging is to produce evergreen content that will be fresh no matter when read. Well today I’m going to make an exception. Here are my thoughts on what is going on in the 2020 Economy..
Doesn’t the Market Care About the 2020 Economy?
Not a day goes past that I don’t read another article screaming about how crazy the stock market is. The market is going up while the 2020 economy is rocky. Doesn’t the market “care” about the current situation. How can it ignore economics?
The Stock Market is not the Economy
Well the first thing to understand is the stock market is not the economy. It never has been. There have been plenty of stock market crashes without recessions and vice versa. The reason is 2 fold.
Defining the Market
What does the market measure? The market measures essentially the price people are willing to pay for stocks. What are stocks? Fractional ownership of a company in the economy.
When people say the market is up in the US they often mean the S&P 500. But the first thing to understand is the S&P 500 is just one market. It is a market of 500 large companies in the US only. That means it’s pricing reflects only those 500 stocks, not the entire economy.
The 2020 Economy Did Impact Companies in the S&P500
But wait there is more. Many of those 500 company’s revenues dropped dramatically due to Covid. So why didn’t the market drop again?
Well the second thing to understand is the market price is a measurement of what people are willing to pay for a stock. Typically people pay for a stock based on future earnings. IE how much profit a company is expected to make in the future, after purchase, is what is really what drives a stock price. The economic situation for these company’s today is not the same as the expectation of the economy say 3 years from now. As such the current 2020 economic impact on the S&P500 company’s is also not what is being measured. Instead it is the long term impact.
Concentration, Tech Stocks, Not Everything is Up
But things get even more tenuous for the link from 2020 economy to the S&P 500 from here. You see, the S&P 500 is a collection of 500 stocks. You’ve probably heard the market is at all time highs. But that doesn’t mean all 500 stocks are at all time highs. The market, as it always has been, is highly concentrated in certain sectors of the economy. Currently that concentration is tech stocks (It’s been other sectors in the past).
So what company’s are best suited for a Covid environment? Well tech stocks are probably high on that list. So the outperformance of tech stocks is driving the S&P 500 up quite a bit as well compared to their peers.
So we can establish a legit a mate rationale that the S&P 500 technical behavior is not related to the present day economics of the US. But the reality is there is another factor also driving up the market.
The Stimulus, the Bond Market, and Excess Funds
The federal government has passed a number of stimulus bills during the course of the pandemic. That stimulus flowed into making some people whole as they lost their jobs. It also made some people more then whole. Some people who never lost their jobs got money. Some people that were on unemployment got more then they make working. This is not a political blog so I won’t comment on those choices. But I will say that the excess funds had to go somewhere.
What were the options for those funds. Well if people spent the money then it would be gone. But with the rampant fear of the economic issues caused by Covid and the reduced opportunities to spend on things like travel I suspect spending the money was out.
Bonds Are A Poor 2020 Economy Investment
Bonds also are probably being shunned by most people. Who wants to lock their money up for ten years for a 1% at best return? Frankly online savings accounts are a far better returning safe investment currently then bonds, offering .8-1% with no lockup period. There is of course risk that the rates will continue to decline, but as we’ve stated before the future price of bonds and inflation are unpredictable.
The 2020 Economy Pushes People Towards Riskier Investments
So if bonds are out where is left for the excess money pumped into the economy by the government to go? Basically online savings accounts, real estate, or stocks. Hey look, real estate and stocks are both on a tear upward. Savings accounts not so much as 1% is still really low and people seem to have some fear of future inflation. But along with everything I’ve said so far it seems fairly justifiable that the S&P 500 would be up since most neophyte investors think of the S&P 500 when you mention investing. It has the lowest barrier to entry level investing.
Nothing is Inevitable
Now, all of this doesn’t mean that the increase in the stock market was inevitable. The market dropped before it rose. Why? Well the first problem was perception. If people are scared enough they run away from risky investments like stocks. So many people sold out last March. But as the market has slowly risen again that fear has largely subsided in the populace. They’ve begun to realize as a whole that the market and the economy can behave differently.
Liquidity and the 2020 Economy
The second reason the market dropped was liquidity. People who lost their jobs suddenly had to pay short term bills. Landlords suddenly had to pay mortgages when rent payments or short term Airbnb stays stopped. Investors on margin had to cover. In essence the initial drop was probably in hindsight related to paying the current bills, not necessarily some different perception from today.
Future Predictions with a Cloudy 8 ball
Which brings me to where do we go from here. Now as always a disclaimer. I have no crystal ball. No one can be sure of the future and attempting to invest based on your perceptions of what will happen is largely a fools errand.
That being said, I still suspect we are heading for a crash in both the stock and real estate market. I have no idea how deep or long. It could be another dip. Why? We go back to that liquidity comment.
Evictions Expected to Spike
Currently evictions for lack of rent or mortgage are halted around much of the US. At some point that halt will be lifted. It seems unrealistic to think the majority of folks will be prepared to pay back the rent or mortgage they may have stopped paying during this period. Combined with normal backlog I suspect there will be a huge spike in foreclosures and evicted renters.
Where Does the Stock Market Go From Here?
I suspect that spike in foreclosures and evictions will lead to an increase in supply in the housing market. It will also lead to liquidity events for some in these markets. Finally with a likely reduced second stimulus round there will be less money floating around going forward. Combine these and I suspect there will be people pulling money out of both markets to pay their bills.
So there we have it, those are my predictions for the stock market and real estate. I won’t even venture a guess as to how long or how deep that drop will be. There is just not enough prior scenarios to compare to for estimate purposes.
Where Does the 2020 Economy Go From Here?
What about the economy, since we’ve established that it travels along a different path then the market? I believe that largely depends on the softer side of things. Psychologically do the aggregate of people have a positive outlook on what happens when Covid clears? Also how long will it will take to clear? If it clears reasonably soon and people stay positive, I suspect we’ll continue the sharp recovery we’re seeing in the labor market.
The 2020 Labor Market
The reality is, even the labor market is fracturous like the stock market. I work in Biotechnology. My industry and those who work in it are largely untouched by the job market pain. I have other close friends who work for the local government. Again they have largely been unscathed.
Others in my circle work in real estate. They got furloughed but were immediately brought back after the initial constriction.
My local fast food and eateries meanwhile all have signs up for hiring but at much reduced staffing levels.. They’ve begun to recover as I live in a rural area where populations tend to be less to begin with so the reduction in people is less of an issue. Eateries in the cities seem to be closing at much higher rates as people flee the cities for the burbs.
But still other sectors are hurting even worse. We know multiple people out of work.
Not Rich Versus Poor But Rather What Sector
The media likes to portray this as the rich versus the poor, but honestly it’s more like industry versus industry. Moguls like Richard Branson that own Airlines are hurting just like those who work in that industry. Conversely tech executives and their workers are many times still living as if this never happened.
That weird situation where some industries are in a clear recession while others are untouched is unlike anything I’ve seen in my lifetime. Sure other recessions are remembered for hitting a specific sector harder then others, see the dot com bomb.
But in those cases things swept to other sectors of the economy. So far the Covid effect has stuck largely to specific sectors.
2020 Economy and Unemployment
The key is not the impact of those specific sectors. As we’ve discussed in the past about changing jobs if these sectors remain down and out for too long the work force will adjust. If they remain where they are In the medium term, well then the conditions stay largely static. Many of the sectors impacted by Covid the hardest were already on life support (Retail comes to mind).
No the real question for the economy going forward is whether the economic recession spreads to these other sectors. That’s where the perception comes in with respect to company investments, expansion plans, and consumer spending. Time will tell.
What Am I doing for Now
As for us. We purchased our travel trailer. I had been allocating extra to online savings accounts for that purchase. In addition because of the market performance our allocation has shifted more heavily to stocks then normal. As such through the end of the year I will continue to favor online savings accounts for new money. Meanwhile our automatic deposits will continue to flow to stocks at their normal rate.
For our existing investments as per normal I will not do anything. I have no crystal ball and I will not attempt to time the market.
Finally I continue to donate at an increased rate to help those less fortunate/in those more severely effected sectors of the economy. We will get through this and in ten years it will probably be forgotten. I know that’s of little solace now, but most of us can’t do much more then help others and wait.