Quote of the Week
“Excellence is never an accident. It represents the wise choice of many alternatives. Choice, not chance, determines your destiny.” –Malika E. Nura
“May we live in interesting times.” A Chinese expression.
Having lived through an Internet bubble, the attacks of 9/11, and the Great Financial Crisis during my career in financial planning, I thought I had seen just about everything. Wrong. I never expected anything as “interesting” as a global pandemic, the worst GDP decline in modern history, mass protests across America, and the sharpest sell-off and the quickest recovery in U.S. stock market history. And it is only June.
But what I see now when I look around, I see the signs of rampant speculation and investing complacency everywhere.
- Bankrupt companies are routinely the highest gainers in the stock market.
- The Put/Call ratio is at an absolutely extreme level near the year lows which is a sign of complacency. This is a ratio of negativity vs enthusiasm or in other words investors are way more positive than negative.
- In the last 10 weeks, every single stock in the S&P 500 is up.
- The smallest and worst companies are doing the best.
- Every taxi cab driver and shoeshine boy has a Robin Hood account and is minting it. A Robin Hood account is an internet account where you can invest as little as $1 to buy partial shares of a company.
- And, every investor is an expert and is doing end zone celebrations due to their trading prowess.
Time will tell how the story ends, but the signs are all there as just before the 1929 market crash (top to bottom down 89%). As Warren Buffet famously said: “In the short run the stock market is a voting machine and in the long run it’s a weighing machine”
On Friday we learned that the U.S. economy added 2.5 million jobs in May. The prediction was that we would see job losses of about 8 million. The unemployment rate unexpectedly fell to 13.3%, down from 14.7% in April and far better than the 20% predicted by economists.
The number was certainly a surprise which drove the stock market up last week with the Dow up 6.8%, the Nasdaq up 3.4%, and the S&P 500 up 4.9%. But wait a minute, as good as the numbers were, the jobless data contained some strange quirks. For example, workers who are considered “furloughed” were not included among the unemployed. Strange, they represent 4.4 million workers and they don’t seem to me as though they are “employed”. The Bureau of Labor Statistics acknowledged that if it had counted those people the unemployment rate would have been 16.3%
The PPP “Paycheck Protection Program” was nearly fully implemented as of last week. This program loans employers money to keep employees on the payroll with a forgivable loan to the employer if they rehire or keep those employees even if they don’t need them. I have done a Google search to find out how many people are keeping their jobs because of the PPP, but I can’t find any statistics. But I think it must be in the millions.
The big potential turning point for employment is coming soon. The money for the PPP has been almost totally distributed. If Congress doesn’t extend it, I don’t see how unemployment doesn’t rise substantially.
The problem going forward isn’t a supply side issue, it is on the demand side. If people are out of work, they don’t have the money to spend. If companies don’t have customers they won’t succeed, so they won’t need employees. To keep the ball rolling Congress will have to act soon. If we allow the economy to get too deep into a hole it will be that much harder to climb out.
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These are the opinions of Larry Lof and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.
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