Amid the Rally, That Sinking Feeling
The crippled economy is taking on water like a ship that hit an iceberg, but Wall Street keeps partying in the ship’s ballroom as if everything is fine. Denying economic and financial reality can only last so long until disaster occurs. Below, I’ll show you how to protect your wealth.
Don’t get me wrong. I want you to stay invested in stocks. Plenty of profitable opportunities exist in the stock market right now. But you need to remain disciplined and avoid trading on rumors in the news cycle. As I’ll explain, many individual investors are taking foolish and easily preventable risks. Don’t be one of those “greater fools.”
Shake-up at the Dow…
For the moment, at least, euphoria reigns on Wall Street.
The three main U.S. stock market indices soared Monday, extending last week’s gains. The Dow Jones Industrial Average jumped 1.35%, the S&P 500 rose 1.00% (to close above 3,400 for the first time), and the NASDAQ climbed 0.60%. Stock futures Tuesday morning were poised to extend gains.
The Dow underwent a huge shake-up Monday, to offset Apple’s (NSDQ: AAPL) stock split. Amgen (NSDQ: AMGN), Honeywell International (NYSE: HON), and Salesforce (NYSE: CRM) will join the 30-component Dow to replace Exxon Mobil (NYSE: XOM), Pfizer (NYSE: PFE), and Raytheon (NYSE: RTN).
Apple’s 4-to-1 stock split, which takes effect August 31, would have reduced the Dow’s weighting of the technology sector. Adding cloud-based software company Salesforce restores balance.
Overall, the change at the Dow is intended to remove overlap, maintain diversification, and add types of companies that better reflect the current status of the U.S. economy. I’ll explore the deeper ramifications of the Dow’s move in future columns.
The race for a cure…
The rally in large part has been fueled by optimism over potential coronavirus treatments, not fundamentals.
Don’t simply take my word for it. Analysts at UBS (NYSE: UBS) examined how stocks have responded to coronavirus vaccine news during the pandemic. They calculated that optimism spawned by vaccine announcements added about 6.5 percentage points to the S&P 500’s return since May. That’s a shaky foundation for a rally. As I’ve asserted before, expectations that a COVID-19 cure is around the corner are delusional.
The U.S. Food and Drug Administration (FDA) on Sunday gave emergency approval for convalescent plasma as a treatment for coronavirus. The FDA and other agencies are deeply skeptical that these exotic plasma treatments are effective or even safe against the virus, but health officials bowed to political pressure and gave them the green light.
Additional examples abound of political leaders pressuring regulators to bypass standard testing procedures to push unproven coronavirus treatments. The breathless headlines about an emerging vaccine have been cheering investors and lifting stocks. But promises of an imminent vaccine are magical thinking at best and deliberate lies at worst.
Health experts warn that it’s nearly impossible for a safe and effective vaccine to get developed and distributed to the public before the end of the year. The key words here are “safe” and “effective.” Many investors are overreacting to vaccine hype because they’re driven by a Fear Of Missing Out.
I have to shake my head whenever I watch investors hurriedly pile into biotech stocks that are mentioned in press releases about a COVID-19 vaccine. It’s lemming-like behavior at its worst.
I used to serve as a congressional press secretary. Take it from me: people in power laugh cynically at how much mileage they get by simply sending out press releases to the gullible masses.
Until the pandemic is under control (which is far from the case), there will be no sustainable economic recovery. Indeed, as of this writing on Tuesday, new coronavirus hot spots are emerging in the U.S., with deaths in the country currently exceeding 177,000. Estimates call for more than 200,000 deaths by September.
Aviation as a microcosm…
My specialty as an analyst is the aviation sector, so let’s look at aviation as a case study of the broader economy’s woes. Unlike Big Tech, airlines and ancillary industries have gotten crushed. And yet, among the biggest gainers on Monday were airline stocks, on hopes for a coronavirus vaccine.
The aviation industry is in crisis. The latest projections from the International Air Transport Association (IATA), the major trade group for the global airline industry, suggest that it will take several years to even come close to 2019 demand levels (see chart).
The U.S. is home to the largest air travel market of any single country, with about 926 million passengers transported in 2019. Because of the lack of advanced rail transport in America, airlines play a vital transportation function for individuals and many industries. The collapse of the airlines suggests that the communities and companies that depend on air transport are headed for trouble.
Air cargo is an economic bellwether and cargo activity has been deteriorating in tandem with the decline in global trade. Meanwhile, it’s structurally unfeasible for airlines to match disastrous revenue declines with comparable expense cuts.
Big Tech stocks have been soaring, but a competitive global economy does not live by Silicon Valley alone. In the prelude to the dot.com bust of 2000, the sentiment was that we were enjoying a Brave New World in which fundamentals didn’t matter because technology had changed the rules of the game. We saw how that turned out.
Hedge your bets…
A financial storm is brewing. It’s entirely possible that the February-March market plunge was only a correction that presaged the real bear market to come.
You need to be proactive and take defensive measures. One time-proven crisis hedge is gold. The conditions that I just described are nerve-wracking for investors but manna for the Midas metal.
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John Persinos is the editorial director of Investing Daily.