This enormous positive run has prompted cheerful predictions that the stock market is telling us that better days are near at hand, despite more than 109,000 deaths from the coronavirus pandemic; tens of millions of recently unemployed people, last month’s reported employment gain notwithstanding; civil unrest in cities and towns throughout the country; and political and social divisiveness, which I suspect may be our country’s biggest problem of all.
Now, to the main point. The stock market is supposed to be a predictive indicator, right? So if stocks are going up so much so quickly, isn’t the market trying to tell us something?
Not necessarily. I’d love to join in the happy buzz, but I’m not at all sure about the market being an accurate predicting mechanism, either up or down.
As the late, great and occasionally playful economist Paul Samuelson wrote in a 1966 Newsweek column, “Wall Street indexes predicted nine out of the last five recessions.”
That being the case, there’s no reason to think that optimistic predictions based on rising markets are any more accurate than pessimistic predictions based on falling markets.
In addition, we need to put things in context. Despite the big 53-day run, stocks are still down about $1.6 trillion, or 4.47 percent, since the pandemic began affecting the market, according to Wilshire Associates. The market is about where it started the year.
And then there’s a math lesson from Dan Wiener of Adviser Investments. He points out that if the S&P 500 were to keep rising at the rate of the past 53 trading days, it would post an annualized return of 472 percent (not counting reinvested dividends).
Somehow, I don’t think that’s going to happen.
Besides, if you think the market is a great predictor, it was telling us about 10 weeks ago — when the S&P fell 34 percent in a bit over a month — that the end of the world was at hand.
Which it wasn’t.
Why are we seeing such extreme swings? I sure don’t think it’s because of changing perceptions on the part of investors.
Rather, I think a lot of it has to do with momentum, where prices keep going up because they’re going up, or going down because they’re going down. Sure, that’s not what they teach in Markets 101. But I think it’s happening because trading volume these days consists largely of computers trading with one another, not people analyzing situations and making bets.
In the short run, anything can happen. And these days, it frequently does.
In the long run, stock prices are determined by interest rates and earnings. It’s hard to foresee interest rates lower than the ones we’ve got now, and I have no idea what corporate earnings are going to look like over the next few calendar quarters. And I don’t know if anyone knows.
Look, I’ve got a lot of skin in this game, because most of my net worth is in stocks.
So I’m a guy who wants to see stocks go up. And because I care about this country, I want to see Americans and the American economy do well.
There’s an idea abroad in the land that Friday’s employment report from the Bureau of Labor Statistics that showed employment unexpectedly rising in May means that everything looks great for the economic future.
I wouldn’t be so sure, however. For starters, the unemployment rate would be 16.3 percent had the BLS not had an error in its report. That would be down from what would have been about 19.7 percent rather than the reported 14.7 percent.
But there are still more than 20 million people unemployed.
What’s more, the only reason unemployment fell and our economy hasn’t totally imploded is that Congress has thrown trillions of dollars at our economy to help businesses survive and stop people from having to file for bankruptcy en masse because they lost their jobs, had no income and little or no savings, and couldn’t pay their bills.
The Federal Reserve, which has the power to create money, has thrown record amounts of cash at various parts of the securities markets to keep them afloat.
But now — unfortunately, in my humble opinion — Senate Majority Leader Mitch McConnell and other Republicans, including President Trump, are talking about cutting back sharply on aid in the next stimulus package, which they seem in no hurry to pass.
Given that the only thing keeping business and the economy afloat has been massive amounts of borrowed taxpayer money and Federal Reserve moves to try to stabilize financial markets, cutting back on the taxpayer money being shoveled into the economy could cause things to start sinking again.
Things could get ugly — I mean, really ugly — if states, cities and school districts don’t get the financial aid they need to avoid massive layoffs.
Not to mention what happens if the coronavirus stages a comeback in the fall.
I don’t know where stocks — and the economy — go from here. No one knows.
The one thing I do know, however, is that stocks going down sharply (as they did from mid-February through late March) doesn’t necessarily mean the end of the world is at hand, and stocks rising sharply (as they have done since then) doesn’t necessarily mean that everything is good and getting better.
It’s foolish — and dangerous — to let the stock market’s day-to-day moves drive public policy, which I’m afraid is the kind of thing that Trump (who takes credit for rising stock prices but no blame for falling stock prices) could well try to do. Just because the stock market has recovered most of its coronavirus-related losses doesn’t mean that our economy — and our people — have recovered.
If you’re looking for profits, the stock market is the place to be. But if you’re looking for prophets, you’d best look elsewhere.