To no one’s surprise, April was an absolutely awful month for the economy. Numbers were released that showed a GDP contraction of 4.8%. 30 million people lost their jobs and the unemployment rate reached over 20%. Many businesses remained closed.
But this was all intentional. We shut things down on purpose and everyone knew it was coming. The terrible economic numbers did not shock market participants. We were numb to it after a near 40% drop in stocks already and daily bad news. That previous market crash was discounting the data that we just received.
In other words, bad economic data was already priced into the market. In fact, it was overdone. We know this because stocks bounced back hard. It may just be a temporary recovery but this has been a month-long rally where substantial money has been made from holding on and rebalancing portfolios. Since the market low on March 23rd, the Dow shot back up from roughly 18,000 to 25,000. It was a 50% retracement from peak to trough.
So, it was an awful month for the economy and a great one for stocks.
Again, this rally could be short-lived. We have some seen some cracks in the surface the last few trading days. I would not be surprised if we pulled back a bit and endured a choppy May. I’d be more than happy with consolidation at these price levels while the country gets healthy.
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Interestingly, some people are actually angry that stocks went back up as much as they did. Perhaps they sold near the bottom and have been sitting entirely in cash. Maybe they are mad they didn’t get a chance to buy more. Or they could be frustrated that it seems illogical for stocks to go up as many states remain shut down.
I get all of those reasons. Timing the markets is near-impossible and they don’t always make sense.
However, some financial pundits are of the opinion that our government and Federal Reserve should not have stepped in to “fix” things and “bail” everyone out. Or at least not as much as they did.
Well, that, I don’t get. This is an unprecedented public health crisis — not a financial bubble based on poor lending practices like in 2008. Coronavirus has affected everyone in some way and we needed action. The Federal Reserve rightfully moved rates to zero and they also were correct in pumping money in the bond markets for liquidity purposes.
Maybe I’m being short-sighted but I’m not worried about the Treasury printing money or the country’s increased budget deficit due to the gigantic stimulus bill. Those indeed could be long-term problems. But we needed immediate solutions. The alternative was letting it all burn, which is no alternative at all. There’s a good chance we could still see even more stimulus packages since many small businesses aren’t getting access to money yet. Individuals may also need another round of direct payments and/or a continuation of their unemployment benefits.
So, if we run into hyperinflation and a weakened dollar later on due to the fiscal and monetary relief provided during coronavirus, then so be it. That would simply mean that the steps taken to combat our country’s shutdown were successful. It would mean that things are back on track — at least from an economic perspective. Let’s hope that we do indeed have this quality problem.
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If you follow the daily market movements during this pandemic (and I probably recommend that you don’t), the news that moves the needle most is information on drug trials for virus treatments, vaccine timelines, test results, and curves flattening. Economic numbers are important and they do matter. They will matter more again in the future. But even the stock market knows what matters most right now.
This post is an excerpt from a private client newsletter on 5/3/2020.