Good Morning. If it's Thursday, it's time to review my thoughts on the drivers of the current market action.
Our Review Process: Once we have identified the state of the big-picture environment (Market Model Mondays), the current trend and the degree of momentum behind the move (Technical Tuesdays), and the potential for a countertrend move to develop (Early Warning Wednesdays), we move on to a subjective review of what is behind the current market action. The idea is to attempt to "stay in tune" with what IS happening in the market - as opposed to focusing on what we think "should" be happening.
My Take on the State of the Market:
To be sure, the stock market has put on quite a show since March 24th. While most everyone on the planet (including yours truly) couldn't see how the lows of the waterfall decline wouldn't be "retested" at some point due to the nature of the crisis, once again, a spectacular V-bottom occurred instead.
IMO, the ginormous move off the bottom has been powered by (a) unprecedented Fed intervention (where the rules of the game were completely changed), (b) helicopter money being dropped from the sky via stimulus checks, the PPP, and various other lending programs, and (c) the idea that the recovery will be quick and complete.
It's that last part that appears to be the primary driver of the current market action. Stocks appear to have "pulled forward" expectations that economic growth will resume and drag corporate earnings along for the ride. The assumption seems to be that a medical solution (aka a vaccine) will be available during the period of time in which the stock market tends to "look ahead."
As I've opined a time or two hundred, the stock market is discounting mechanism of future expectations. Depending on who you talk to, the thinking is the market "looks ahead" between six and twelve months.
So... If we fast forward six months from now, into mid-January 2021, it is looking quite possible that vaccines will be available. Which, of course, would mean that things could indeed return to "normal."
However, in order for economic activity to truly return to the old normal, you know, where social distancing isn't a thing anymore, most everyone will need to be vaccinated. And the bottom line is vaccinating 8 billion people is gonna take a while.
Thus, from my seat, the stock market is currently in the process of discounting the odds of the full recovery happening in the expected timeframe.
About That Recovery
As I've written recently, we have seen some surprisingly good data from the economy. When coupled with the surprisingly good news on the vaccine front, this has allowed investors and fund managers to look on the bright side and put money to work.
On this front, the good news is we learned overnight that China became the world's first major economy to report economic growth on a year-over-year basis as GDP rose by 3.2%. This would seem to bolster the recovery theme.
However, this morning's news on jobless claims here in the good 'ol UsofA is a stark reminder that the damage to the local economy is severe, which, of course, puts a bit of a dent in the idea of a "quick and complete" recovery.
One Number To Watch
My guess is you probably don't spend a lot of time with the weekly jobless claims data. Frankly, neither do I most of the time. However, right now, this is important data set to watch because it provides us a clue about the state of the recovery.
According to the Labor Department, initial weekly jobless claims came in at 1.3 million for the week ending July 11. This was a bit above consensus expectations. But the important stat is this was the 17th consecutive week that initial claims were over a million.
However, from my perch, the more important headline was that continuing claims for unemployment benefits (those receiving benefits for at least two consecutive weeks) stood at 17.33 million for the week ending July 4.
Based on my back-of-the-napkin analysis and my recollection of the high-water mark for the unemployment totals, this means that a very healthy chunk of the people who filed for unemployment during the economic shutdown remain unemployed.
Sure, a great many of these folks worked in the industries that have been the hardest hit by social distancing. And yes, reports indicate that a lot of the currently unemployed are actually making more money on unemployment than they were at their jobs due to the "extra $600" benefit that Congress provided (which expires at the end of this month). So, I "get" that the continuing claims numbers may be artificially elevated here.
But here's the sticky part. Let's say half those people go back to work in the next couple months. This means that nearly 9 million would still be unemployed, which, historically, is a massive number. As such, it is easy to imagine that the "recovery" won't be complete until unemployment returns to where it was in January.
The Bottom Line
I think it is safe to say that the road to full recovery is going to be bumpy, at the very least. And I'm of the mind that this road is also likely to be longer than what is currently being priced in to the stock market. Therefore, I would not be surprised to see (a) the current back-and-forth market continue as traders game the odds of a recovery and (b) some sort of meaningful correction in the coming months.
My thinking is corrective action would be warranted if the re-closing seen in California becomes a trend as this would no doubt delay the recovery.
I certainly hope I'm wrong here and that stocks can continue to work higher. But if I'm not, it might be wise to have your defensive playbooks at the ready. Because I'm not sure the bulls are simply home free at this point.
Thought For The Day:
"Joy depends on perspective, not circumstances." --Robert Jeffress
Wishing you green screens and all the best for a great day,
David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research
At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.
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