7/23/20 Campaign
The global COVID-19 pandemic has sent stock markets worldwide on a wild ride. However, while stock markets have regained much of their losses, we are still in a pandemic and our economy is struggling. In this newsletter, we investigate why the market has recovered while our economy has not. Among the reasons are a lack of investment alternatives.
Wild Ride of the S&P 500
On February 19, 2020 the S&P 500 peaked at 3386 points for the year 2020, only to fall sharply soon thereafter. The index bottomed out at 2237 points on March 23, 2020. Since then it has regained almost all of its loses and increased by 44% or 987 points. On July 17, 2020 the S&P 500 closed at 3224 points. See chart “S&P 500 Year-to-Date Performance” for details. That is truly a wild ride that can be unsettling for some investors. How can this be given the current state of our economy?
State of the U.S. Economy
A look at a variety of economic indicators, reported at one-month intervals between since the beginning of the year 2020 gives us a flavor of the current state of the U.S. economy. These indicators have all dropped off a cliff in the face of the pandemic – implying that the economy is in bad shape, or more specific, in a recession.
Employment rates, oil prices, consumer confidence, and the 10-year treasury bond all paint a clear recessionary picture. See the group of charts “Economic Indicators 2020” above for details. The same picture is true for other indicators such as industrial production, durable goods orders, and retail and food sales. At least the inflation rate has remained stable.
The U.S. officially entered a recession in February 2020, according to the National Bureau of Economic Research. It’s the country’s first recession since the Great Recession a decade ago and its severity has drawn comparisons to the Great Depression of the 1930s, the country’s worst economic downturn in the industrial era.
And yet, the stock market has rebounded much faster than the rest of the economy. Why?
Reasons for the Disconnect
As is usually the case with economics, it is a bit complicated and there are many different theories. Let us review the most plausible explanations. First, prominent tech companies that top the market, such as Amazon, Microsoft, Netflix, Apple and others, actually have reason to believe that the pandemic could shift more business in their favor, as many businesses and individuals are placing a greater importance on digital shopping, communication and entertainment.
Second, many market participants are optimistic about a “V-shaped” recovery, rather than a much slower “swoosh” shaped recovery. Not even the worst quarter of corporate earnings since the Financial Crisis in 2008, nor the lack of reliable future earnings guidance has deterred these market optimists from holding on to their positive outlooks. On average, stocks trade at a price-to-earnings ratio of 20. Given that earnings are annualized, the future earnings of the year 2021 only make up 1/20th of the entire price-to-earnings ratio. And sometime in 2021, a vaccine should be available allowing us to return to normal economic activity, following an optimistic view of the future.
However, the level of volatility in the market remains at a very high level. When news of the COVID-19 crisis first hit on March 16, 2020, the VIX volatility index jumped to 82.7, its highest level ever. News of a COVID-19 resurgence on June 11, 2020, caused the index to spike once again to 40.8, another abnormally high number. During normal economic times, the index level hovers between 10 and 20. So, despite the rising stock values, uncertainty rules the stock market. Yet institutional and private investors continue to flock to the stock market. Which brings is to our last reason.
A lack of alternative investment options is the third explanation for rising stock values.
Investor have to ask themselves the question - where can I still earn a satisfactory return? Since interest rates have hit rock bottom, classic investment vehicles like CDs and treasury bonds have been so unattractive that the stock market seems to be the only viable alternative. Thus, from large institutional investors to many private investors, most have begun parking their money in the stock market, and by joining the market, they have sent stock prices up.
We would like to offer you a viable investment alternative to the stock market that focuses on the safety of your principal as well as constant cash flows at a high rate of return. Thus, we encourage you to take a look at the concept of First Deed Lending, which provides you with the advantages of renting, without the hassle of being a landlord. This is your opportunity to earn a stable stream of income during volatile times.
