Compounded Trends By: Gabriel PotterMBA, AIFA® 2020.05.18

Pop quiz:  How has the US stock market done over the past year?

Answer:  It’s flat. Given the fact that we are in the steepest economic decline since World War II, the strength of the stock market has been astonishing. 

To be more specific, if you were to compare the S&P 500 price level at May 20, 2019 – 2840 – and compare it to Friday’s last price – 2863 – it is actually a little up.  Broader indices, like the Russell 3000 are also just about flat for the year, despite the drag of small and mid-cap stocks relative to the largest companies.    To be sure, other indices are slightly down in terms of price, like the narrower Dow Jones Industrial Average.  Still – with US companies yielding about 2% in dividends to compensate for nominal losses, it’s fair to assert that broad stock market indices are essentially flat over the one-year period.

So does this mean the crisis is over? Are we ready to get back to normal now?  Hardly.  Remember the stock market represents the collective best guess from investors on the future.  Most of Wall Street is optimistic about the potential resolution of the health crisis.  At the time of this writing – about 10 am on May 18th – the Dow Jones is up about 700 points based on positive data on potential vaccine trials.  That is unequivocal good news and investors are entitled to some optimism.  However, the timeline of the economy is not the same as the timeline for the markets.  Even in the absolute, best case scenario – a vaccine is still several months away.  Economic activity probably bottomed out in April as most states were under full lockdown.  Economic activity is likely to grow through the next few months as states ease lockdown measures, but it is still going to be suppressed from its peak as many industries and activities are still being limited including airlines, entertainment venues, sporting events, festivals & social gatherings.  Much of the economy can operate under the new rules but there will be some changes.

What the lockdown has already done to the economy is accelerate trends which were already going.  The trend away from coal as an energy source has increased as the demand for energy peters out.  The trends towards plant-based protein increased as distribution problems in the meat packing industry occurred as a result of outbreaks.  Finally, the trend towards online retail has increased as consumers, understandably fearful of crowds and personal interaction during a pandemic, opted against classic brick-and-mortar stores for internet shopping.  National retailers like JC Penney and Neiman Marcus are feeling the sting; both stores filed for bankruptcy this month.

We are gratified that the markets are looking past the pain towards brighter days ahead.  There are valid reasons for long term optimism, and we celebrate that.  However, let’s not fool ourselves into thinking the real-world economy is going to be running at full steam anytime soon.  Recovery will come back slowly, in fits and starts, as employers and producers determine what the new baseline of consumption is going to be under an economy suppressed by coronavirus.  Employment will improve as companies and businesses ramp-up, but the recovery will be slower than the downfall.

 

 

 

 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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