Displaying items by tag: recession
Markets tumbled yesterday, and it appeared to happen mostly because of the resignation that a second wave of COVID-19 was forming across the US. In several recently reopened states the number of hospitalizations has been surging, leading investors to fear that more lockdowns—and their corresponding economic damage—could be on the way. Top epidemiologists have been warning of a second wave, and one leading doctor said he worries about states reopening before they have the virus truly under control. “My worry is that we end up in a kind of stuttering, endless loop”, says Dr. Schneider of The Commonwealth Fund.
FINSUM: The market was priced for perfection, and a big second wave didn’t fit that narrative. Hence the 6% fall yesterday. Going to be choppy for a while as the market’s bad news antenna is back up.
Friday saw the release of what appeared to be absolutely stellar jobs numbers. Instead of the jobless rate potentially hitting almost 20%—which was the forecast—the opposite happened: the unemployment rate fell to 13.3% in May from over 14% in April. Markets soared. However, the reality is that those numbers are both highly inflated, and unrealistic. Firstly, the Bureau of Labor Statistics counted those who are currently furloughed and unpaid as “employed”. It admitted that if it hadn’t done so the unemployment rate would have jumped to over 16%. Secondly, the big jump in hiring was at least partly, and probably hugely, because of an artificial government rule in the PPP program. Small businesses had to hire employees back by the end of June to have their loans turn into grants, so there were artificial incentives to put people back on payroll even I the absence of true business demand.
FINSUM: If you take these two facts together, it becomes clear that the May data is not really a reflection of an economic pickup, so don’t make any predictions based on this.
Investment bank research teams all over Wall Street have been sounding the alarm about how untether from reality markets seem to be. Many are warning investors of another big fall in stocks, and at the same time are telling corporate customers to tap markets for funding as much as they can before another fall. Now hedge funds are joining too, saying it is time to pull back. One manager said “The markets are priced to perfection … The stability in equity markets does not reflect the job losses and the insolvencies ahead of us globally”. Paul Singer of Elliott Management made a specific call, saying “our gut tells us that a 50 per cent or deeper decline from the February top might be the ultimate path of global stock markets”.
FINSUM: In principal a big fall seems warranted, but it is hard to fight the Fed.
The Center for Disease Control made a pretty worrying announcement today. The CDC has previously warned that American could see a big uptick of the COVID-19 virus in the Fall, when temperatures cool down and flu season ramps up. It echoed that more strongly this week, citing evidence that the virus is gaining ground in the southern hemisphere as their winter takes hold. According to Robert Redfield, head of the CDC, “We’ve seen evidence that the concerns it would go south in the southern hemisphere like flu [are coming true], and you’re seeing what’s happening in Brazil now … And then when the southern hemisphere is over I suspect it will reground itself in the north”.
FINSUM: The reality is that a vaccine will not be ready before the next flu season starts, so it is pretty easy to imagine that the virus might see a big second wave in the Fall that leads to another lockdown.
The bond market is usually ahead of the stock market in predicting and reacting to the economy. It seems to be doing so again. While stocks have had a huge run higher, bond yields have largely been stuck at very low levels. The ultra-low yields of around 0.7% on the ten-year Treasury mean that bond investors see a long, hard, recovery looming and many years of continued aggressive monetary stimulus by the Fed.
FINSUM: Stocks seemed to have gotten a dose of realism over the last two weeks, but yields may be more reflective of the difficulty of the recovery to come.