When Good News Is Bad News

The stock market rally reminds me of the Saturday morning cartoons that I used to watch as a kid. When a cartoon character runs off a cliff, gravity has no effect…until the character notices.

When investors finally bother to notice the disconnect between the rise of stocks and the horrible state of underlying fundamentals, it’s my belief that equities will plunge like the hapless coyote in a Warner Brothers cartoon.

Last Friday, investors were cheered by an ostensibly good jobs report. Here’s the paradox: the “good news” about jobs will turn out to be bad news. I’ll explain what I mean, below. I’ll also steer you toward an exciting investment opportunity that’s largely insulated from these economic travails.

In the meantime, sky-high stocks are defying the laws of physics. The S&P 500 on Monday climbed back above where it started the year, before the coronavirus outbreak became apparent in the U.S. So far this year, more than 112,000 Americans have died from COVID-19 (total deaths are probably under-reported); scores of cities around the country have been roiled by violent protests due to the police killing of an unarmed black man in Minneapolis; corporate profit growth has imploded; the economy is in a severe recession; and the Sino-American trade war has flared up again.

For Wall Street, it’s as if none of this ever happened.

Investors hoping for a fast recovery are deluding themselves about the long-term ramifications of coronavirus-induced lockdowns. Sure, the economy is starting to reopen, but tens of millions of people have lost their jobs and industries such as retail, tourism, hospitality, and entertainment will take many months to recover. Some industries, such as airline travel, will never be the same. For the U.S. travel industry, losses in 2020 are projected to be staggering (see chart):

We witnessed dizzying declines and extreme volatility in March, as the pandemic emerged in the U.S. as a health threat. But since then, Wall Street has grown complacent.

When the Commerce Department announced on April 29 that the U.S. economy had declined at a nearly 5% annual rate in the first quarter of 2020, its fastest quarterly drop since the 2008 recession, investors shrugged and stocks rose 2.7%. A month ago, when the Bureau of Labor (DOL) reported that more than 20 million jobs disappeared in April as unemployment soared to 14.7%, the highest since the Great Depression, stocks rose 1.7%. Last Friday, when the DOL reported that unemployment was “only” 13.3%, investors were euphoric and stocks soared.

In hot pursuit of the roadrunner…

So, what’s keeping this “Wile E. Coyote market” aloft? In a word, stimulus.

Since March 23, the Dow Jones Industrial average has surged 48% and the S&P 500 is up about 45%. The tech-heavy NASDAQ composite is up 45% and closed at a record high on Monday. In pre-market futures trading Wednesday morning, the three main U.S. indices were poised to open mixed, as investors waited for the next batch of data. Thursday’s jobless claims report will take center stage.

In response to the economic devastation of the COVID-19 lockdowns, the Federal Reserve has pumped about $2.9 trillion into financial markets. The biggest gainers in the stock market rally have been large-cap corporations that faced an existential crisis because of the pandemic. They’ve been buoyed by federal assistance, prompting investors to rush in and buy shares at bargain prices.

Indeed, the rally has been mostly fueled by a handful of large-cap stocks, particularly in the technology sector. Investors are betting that the Silicon Valley giants will benefit down the road from the changes wrought by the pandemic on consumer behavior, as more and more people become accustomed to mobile and remote technologies. However, in recent days, mid- and small-cap stocks have joined the rally and given it greater breadth, a sign that investors foresee robust economic growth in the near future.

Problem is, the Fed is reaching the limits of its wherewithal and Congress has signaled that it’s reluctant to provide further help. Leading lawmakers in Washington, DC provided the initial stimulus only grudgingly. Now, in the face of the “good news” on jobs, they’re inclined to turn off the spigots. Making matters worse, if you look closely at the jobs report, it’s a lot weaker than advertised.

Read This Story: The “Creative Accounting” Behind the Rally

Also keep in mind, the Paycheck Protection Program, which provides small business loans that can be converted into outright grants if they’re used to sustain payrolls, is already out of money and the job support lasts only eight weeks.

The economy is plugged into a respirator but pivotal congressional leaders are keen to pull the plug. It reminds me of the situation in the 1930s. Federal stimulus back then was succeeding in bringing the U.S economy out of the Great Depression, so the government assumed it was safe to substantially cut spending. The result was a severe and heartbreaking recession in 1937. The Great Depression also witnessed a series of bear market rallies that raised investor hopes and then crushed them. Let’s hope history doesn’t repeat itself.

Be grateful for the current rally but don’t assume it will last. Pocket some of your gains to elevate cash levels. Also make sure your portfolio contains safe haven stocks. Generally speaking, a reasonable allocation mix right now is 60% stocks, 15% hedges, 15% cash, and 10% bonds. Tailor the percentages to your particular needs, temperament, and stage of life.

Editor’s Note: I’ve just discussed the mounting risks in the stock market. A shrewd way to protect your portfolio and at the same time reap outsized gains is to tap into multi-year trends that are largely resistant to market ups and downs and economic cycles.

One such trend is the increasing decriminalization of psilocybin fungi, aka “magic mushrooms.” Yep, you read that correctly. The magic mushrooms of counter-cultural lore are becoming a mainstream for-profit business, as a growing number of local governments decriminalize their use.

Magic mushrooms contain a naturally occurring psychoactive and hallucinogenic compound called psilocybin. This compound creates altered perceptions of reality, causing users to see, hear, and feel sensations that don’t really exist outside of the mind’s eye.

Read This Story: Will Magic Mushrooms Soon Sprout Profits?

But magic mushrooms aren’t just for getting stoned and staring at lava lamps. Empirical research shows they can help ease physical pain, depression, anxiety, chronic headaches, and a host of other ailments. Magic mushrooms are destined to play key roles in the future of therapy, in medicine and psychiatry.

Our analysts have been researching the exciting investment opportunities in magic mushrooms. In fact, we’ve pinpointed one company that’s poised to dominate this emerging industry and reap the lion’s share of the investment spoils. Click here for details.

John Persinos is the editorial director of Investing Daily. You can reach him at: mailbag@investingdaily.com