Stocks vs The Economy: A Tale of Two Recoveries
Okay, class, write down this sentence in your notebooks and memorize it: The stock market is not the economy.
In the public imagination the stock market and economy are synonymous, and of course they influence each other, but they don’t move in lockstep.
Two recoveries will play out in the months to come: the economic recovery and the stock market recovery. Below, I’ll explain why stocks and the economy are moving on different paths. I’ll also show you how to position your portfolio to take advantage of this dynamic.
But first, please take a moment to play the following video message:
Volatility continues to roil the markets. The three main U.S. stock market indices closed mixed on Monday, with the Dow Jones Industrial Average down by 109.33 points. The S&P 500 gained 0.52 points and the tech-heavy NASDAQ composite gained 71.02 points.
The NASDAQ has been on a tear since its coronavirus low in March. In a minute, I’ll explain how to exploit the tech trends that are propelling the benchmark.
As of this writing Tuesday morning, the three major U.S. benchmarks were mixed in choppy trading, as investors digested reopening plans. Stocks opened higher but then gave up gains and struggled for traction.
Reports are surfacing of a second wave of deadly coronavirus. The Chinese city of Wuhan, where the pandemic is thought to have originated, reported five new cases on Monday. South Korea and Russia also are reporting spikes in cases.
Dr. Anthony Fauci, the nation’s top infectious disease expert, warned lawmakers in Senate testimony on Tuesday that the country could face “needless suffering and death” if the American economy reopens too soon.
That said, the S&P 500 has now regained about half its losses from the record high earlier in the year as economies start to tentatively leave lockdown. So far, 31 states have unveiled plans to allow businesses to reopen and social life to resume.
Investors are hoping that the curve of coronavirus cases is flattening, but the evidence is contradictory. Cases are down in places such as New York City. However, the Institute for Health Metrics and Evaluation last week nearly doubled its estimates of the coronavirus death toll in the U.S., from 72,000 to 134,000, in large part because state and local governments are rushing to implement poorly conceived reopening plans.
Considering the massive extent of the pandemic’s damage, I think it’s farfetched to hope for a “V”-shaped recovery for either the economy or stock market. Is a “W” or “U” more likely? There are too many unknowns to make a logical projection. The unpredictable virus has rendered many conventional metrics useless. Only one thing is clear: meaningful recovery will take a long time, with setbacks along the way.
After the 2008 global financial crash, bankruptcies among financial institutions didn’t peak until 2010. State and local governments, their treasuries depleted from plummeting tax receipts, didn’t stop laying off public employees until 2013. Likewise, the bear market that followed the 2008 financial meltdown witnessed several short-lived rallies that petered out until the birth of the bull market in March 2009.
How deep was my valley…
Sure, we’ve emerged from the nadir of March’s historic stock market plunge. But we’re still in treacherous territory. There’s no modern precedent for how the economy and financial markets will behave as we incrementally leave quarantine and reopen businesses.
As millions of Americans lose their jobs, many also are losing their health insurance. Across the country, “temporary” furloughs of jobs and factories are becoming permanent. Thousands (if not millions) of small businesses will probably go bankrupt, creating a long-term economic headwind. The following chart depicts the expected damage to global economies:
And yet, stocks enjoyed a stellar April and they’ve extended their gains so far in May. Many readers have asked me: how the heck is that possible?
The stock market is forward looking, but that’s not sufficient by itself to explain the disconnect. For starters, count yourself as lucky and wise to be invested in the stock market, because only a fraction of American society is invested in stocks. The richest 1% own 50% of stocks held by American households.
For the past several decades, Wall Street has become increasingly divorced from Main Street. The stock market represents a small subset of the population, which helps explain why stocks can still rise despite terrible employment data. Another reason behind the disconnect is the increasingly global nature of big corporations, which means they have a diminishing stake in local economies and job generation.
Generally speaking, the large-cap companies that comprise the S&P 500 are global and profitable, with plenty of cash on hand, diverse sources of revenue, and easy access to capital markets. These companies can better weather an economic crisis than small companies.
Big Tech does the heavy lifting…
Technology stocks have been rising in recent weeks, propelling the tech-intensive NASDAQ into the green for the year. Forward-looking investors are betting that the major tech companies will emerge from the coronavirus pandemic in even stronger shape.
The largest tech companies wield a disproportionate influence on the stock market. By market valuation, the five largest companies listed on the S&P 500 are Microsoft (NSDQ: MSFT), Apple (NSDQ: AAPL), Amazon (NSDQ: AMZN), Alphabet (NSDQ: GOOGL), and Facebook (NSDQ: FB). In aggregate, these five behemoths account for one-fifth of the market value of the index.
Since the market’s March trough, the NASDAQ composite has rebounded to the greatest degree among the major indices, as household tech names report better-than-feared Q1 earnings. These cash-rich innovators are positioned to benefit from the lasting social and economic changes that are being wrought by COVID-19.
The public’s widening embrace of mobile and cloud-based applications during the pandemic will pay off in a big way for the tech sector. Which brings me to the global roll-out of 5G (“fifth generation”) wireless technology.
Wireless is an essential service, all the more so during quarantine. As with many of you, the lockdown compels me to work exclusively from home. I’m utterly dependent on high-speed Internet. Even my best friend in the morning, the coffee maker, is a WiFi-enabled “smart machine.”
The ultra-fast download speeds of 5G expedite the WiFi interconnectivity that’s pervading our lives. Major winners from the pandemic will be the companies involved in developing, operating and implementing 5G.
The key is to pick the right 5G stocks. Applying hundreds of hours of painstaking research, our experts have pinpointed exciting 5G plays that are flying underneath Wall Street’s radar. For details on the best investment opportunities in 5G, click here for our special report.
John Persinos is the managing editor of Investing Daily. You can reach him at: email@example.com