The disconnect from Main Street following coronavirus, George Floyd

How can Wall Street surge while Main Street suffers?

Protest against racial inequality in the aftermath of the death in Minneapolis police custody of George Floyd, in Washington (photo credit: REUTERS)
Protest against racial inequality in the aftermath of the death in Minneapolis police custody of George Floyd, in Washington
(photo credit: REUTERS)
Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.
– Sir John Templeton
Over the last month and half, I think one of the most frequent question that I have been asked goes something like this: There have been approximately 115,000 deaths from COVID-19 in the United States, over 40 million Americans have filed for unemployment insurance, the unemployment rate is over 13%, looting and property destruction have caused big losses in major cities as protests continue over the unnecessary death of George Floyd. With all those headwinds, how on earth can the stock market have recovered almost the entire coronavirus-caused market drop in less than three months?
That’s when pundits like to speak about the real-life problems on Main Street and the perceived disconnect on Wall Street. How can Wall Street surge while Main Street suffers?
While many investors believe that stocks price act in unison with economic performance, the fact is that in many instances, there is little relation between the two.
According to John Jennings of Forbes: “Yes, the stock market and the economy are intimately related, but they do not rise and fall in tandem. Just because the economy is contracting does not mean that stock market returns will drop too. In fact, history shows us that GDP is not a good predictor of future stock prices. It’s actually the other way around: The stock market is a predictor of future GDP – which is precisely what we’re seeing right now.”
I think it’s important to remember that the current global recession isn’t the fallout from a typical trough in the business cycle; rather, this was a government-induced recession, locking down the economy to fight the spread of COVID-19. As such, governments and central banks have provided much-needed liquidity to the economy to get things back on track sooner rather than later.
In fact, streaming money into the economy has been quite successful. Liz Ann Sonders writes on “The surge in money supply is reflected on Main Street as well; with the personal savings rate surging to a whopping 33% of disposable personal income; while at the same time, household net worth remains historically high. The combination of direct payments from the government to most taxpayers, and enhanced unemployment insurance, has paved the bridge for those affected by the coronavirus crisis with more than just good intentions.
“Recent surveys show that about 60% of laid off workers have been made more-than-whole relative to their work-based income prior to the pandemic. In addition, households have been in deleveraging mode since the Global Financial Crisis – with debt levels well below long-term trend lines.”
That’s crazy. Sixty percent of laid-off workers have made more money than had they worked.
The end of the world
When the market dropped a staggering 35% in just five weeks, it seemed it was trying to build in a scenario that the world was ending. What has happened since is that large hi-tech companies have been reporting that business is brisk – not exactly helping the “end of the world” theory. Throw in the impending opening of the economy, and you have a market rally.
Learning from previous recessions, Sonders points out the Main Street/Wall Street disconnect. She writes: “Some of what’s at work is in keeping with the long history of bear markets accompanied by economic recessions. With only one exception in the post-WWII period, bear markets typically started in advance of recessions’ start dates; while bear markets typically ended in advance of recessions’ end dates. With the exception of 2001 – when the recession ended, but the stock market didn’t bottom until the end of 2002 – bear markets ended while the economic data remained in the dumpster.”
It goes without saying that past performance isn’t indicative of future returns. This means that the stock market is a forward indicator, and with plenty of liquidity in the system and 0% interest rates, it appears that the market is giving the signal that the economy will come roaring back faster than many thought possible.
I have been accused by many of being an eternal optimist when it comes to investing. If we have learned anything from market history, it’s that it pays to be an optimist. Sure, the months of February and March were not easy. But the sun kept rising every morning, and the world continued.
Investors took a deep breath and realized that it was time to be rational once again, and that there was no reason for stock prices to be so low. So they started – and continue – to buy back the stocks they had discarded weeks earlier.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.