Tag Archives: Economy

It’s a Stock Market Bubble | Barron’s

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Excerpts from Barron’s article entitled:Yes, It’s a Stock Market Bubble. That Doesn’t Mean Trouble for Investors Just Yet.

By Ben Levisohn, September 12, 2020

“Every stock market bubble begins with a story.”

“”The story began easily enough, if not with “once upon a time.” A virus forced the country to shut down and accelerated the gains in a select few technology stocks that are uniquely capable of thriving with everyone stuck at home. A central bank took quick action to prevent financial markets from seizing up, pushing interest rates about as low as they could go. That helped lift the stocks of companies that are growing, including chiefly the aforementioned tech stocks, even if some have no profits. These stocks were among the first to rally once the stock market bottomed in March.”

“Now, get ready for the plot twist: Good investment ideas can stop being good ideas if the story goes on for too long. The tech trade—including tech companies that aren’t officially labeled as such—went too far before correcting suddenly in the past two weeks.”

“The forces that drove stocks such as Apple and Amazon.com to astonishing heights remain firmly in place. They include the companies’ continued growth, the Federal Reserve’s determination to do whatever it takes to keep the economy afloat, retail investors’ newfound interest in trading, and maybe even a bit of fiscal largess.”

Stocks will remain volatile, but the tech bubble will continue to inflate.

“For an investment bubble to occur, there has to be a widespread belief that a new paradigm has taken hold requiring an adjustment in valuations far beyond what previous fundamentals would imply. This belief needs to engage the imagination of investors beyond Wall Street, and there must be plenty of capital available to chase stock prices higher. The Covid-19 crisis has unlocked all three prerequisites.”

“Consider how the world has changed in the past six months. Social distancing is now the rule, and working from home is encouraged, when possible. Movie theaters are half-empty, and attending school now means opening a laptop at home for many students.”

“Companies that bring us a taste of our previous lives—such as Zoom Video Communications (ZM) and Peloton Interactive (PTON)—have seen their share prices soar. Shares of tech titans Apple, Microsoft (MSFT), Amazon, Alphabet (GOOGL), and Facebook (FB) have risen because the businesses are growing far more than most, and investors know that bigger is better in today’s world.”

“Some retail investors, starved for something to bet on in the absence of professional sports, have turned their attention to stocks.”

“At the same time, near-zero interest rates have encouraged investors to pay up for growth, while some retail investors, starved for something to bet on in the absence of professional sports, have turned their attention to stocks, trading through online brokers like it’s 1999.”

“As a result, Apple, Amazon, Microsoft, Alphabet, and Facebook now account for nearly a quarter of the value of the S&P 500 index, a level of concentration rarely seen in the benchmark. And that might understate the influence of Big Tech. Add Amazon and the S&P Information Technology and Communication Services sectors constitute 45% of the benchmark index, according to J.P. Morgan data, compared with 40% during the dot-com bubble.”

“Even as the biggest tech names have seen market caps swell, some formerly small companies have graduated to the big leagues. Zoom, for one, jumped 41% in a single day after reporting sales that more than quadrupled the previous year’s, a consequence of the video service’s widespread adoption beyond a business audience. Zoom stock, having zoomed 465% in 2020, is now worth more than $100 billion. Peloton has a market cap of $25 billion after gaining 209% this year, as its stationary bikes replaced gym memberships.”

“Zoom trades for 50 times 2020 sales, and Peloton, 9.3 times. Both are priced as if future growth is unlimited—a risky bet, especially if the postvirus world looks not all that different from the previrus world.”

The Fed has pumped trillions of dollars into the economy

“Behind the scenes, meanwhile, the Fed is operating the bubble-making machinery. It has pumped trillions of dollars into the economy, expanding its own balance sheet to more than $7 trillion from $4.1 trillion at the start of 2020. This time around, its asset purchases have included not only Treasuries and mortgage-backed securities but also investment-grade and high-yield bonds. All of this demand has served to lower interest rates to near zero.”

“The Fed typically has burst past bubbles, including the dot-com bubble of the late 1990s and the housing bubble of the mid-2000s, by raising interest rates. Don’t count on that now, or at least not yet. Fed Chairman Jerome Powell has effectively promised to keep rates low for years, which means there should be plenty of cash sloshing around to keep the bubble growing.”

“Perhaps the biggest reason to keep betting on tech—and the stock market—is that things aren’t nearly as frothy now as they were during, say, the dot-com bubble. Even in August, the market never reached the sustained frenzy that characterized the late 1990s, when the major indexes went parabolic and stayed that way for months, says Katie Stockton, managing partner of Fairlead Strategies. Stockton thinks the market’s recent pullback will create another buying opportunity, “A bubble would be characterized by prolonged upside momentum,” she says. “The market doesn’t have that.””

To read more: https://www.barrons.com/articles/the-market-is-a-bubble-but-that-doesnt-mean-troubleyet-51599862332?st=zdbk5yoalgbsduv

Source: https://www.barrons.com/articles/the-market-is-a-bubble-but-that-doesnt-mean-troubleyet-51599862332?st=zdbk5yoalgbsduv

Top Americans by Wealth own Most of U.S. Equity Stocks

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Top 10% of Americans by wealth own 87% of all U.S. equity stocks

The top 10% of Americans by wealth owned 87% of all stock outstanding in the first quarter, according to research from the Federal Reserve. That share has grown over the past decade, from 82.4% in 2009.  Fed researchers say the increase in wealth among the top 10% is largely a result of that cohort obtaining a larger concentration of assets. These increases were mirrored by decreases for households in the 50-90th percentiles of the wealth distribution,” Fed researchers said.

The percentage of Americans who own stock, either directly or through retirement or mutual funds, is falling. It most recently stood at about 55%, according to an April Gallup poll, down from a high of 67% in 2002.

“The middle class has essentially been left out of the stock market surge,” said Edward Wolff, an economics professor at New York University. “The rich have taken off from the rest of society.”

S&P 500 and NASDAQ indexes have closed at all time highs

The S&P 500 and NASDAQ have soared to a new high, wiping out its losses since the worst of the coronavirus-induced downturn in March. Stocks continue to shrug off historic unemployment rates and other economic warning signs.

The S&P 500, the benchmark U.S. stock index, has surged more than 50% since bottoming in March and is back at record levels, largely thanks to the unprecedented stimulus programs enacted by the Federal Reserve and Congress.

Although the stock market has erased its losses suffered during the pandemic, the economy appears to be telling a different story. It contracted at the sharpest rate on record in the second quarter, and the unemployment rate remained above 10% in July, after reaching nearly 15% in April.

The current disconnect between the stock market and the economy is extremely unusual.  The economy is not confirming the stock market’s strength. The stock market has surged since March 2020 lows, with the S&P 500 and NASDAQ indexes eclipsing all time highs in August 2020.

FOMC acknowledged that after the initial surge in job losses and plunge in economic activity, things have started to improve. According to the statement, “Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year.”

U.S. Economy and Stock Markets are Highly Disconnected

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“The stock market isn’t the economy. The economy is production and jobs, and there are shortfalls in virtually every sector of the economy.”  -Janet Yellen, former Chair of the Federal Reserve

We remain in the midst of a global crisis as the impact of COVID-19 infections continues to spread. As a result, we are experiencing an income crisis for a wide swath of the working population. The labor market decline was most catastrophic on low-end age earners. Those jobs have been the slowest to recover and many of those jobs have been loss permanently.

financial markets reflect assessments of the value of assets today based on investors’ expectations for the cash those assets will generate.

The U.S. economy is highly consumer-driven according to economists; our Gross Domestic Product (GDP) levels are guided primarily by consumer spending. The “V-shaped” recovery in retail sales data has been a boon to the bull market narrative. There is, however, legitimate concern over the potential impact if the Congress and Executive branch are unable to hammer out a compromise on extended unemployment benefits.

Causes of the disconnect

“Financial markets reflect assessments of the value of assets today based on investors’ expectations for the cash those assets will generate.” Vanguard Investments

Hope-ism and federal intervention are buoying up the stock market. “Hope-ism” is the wishful thinking that makes investors believe that the economy will not only recover quickly, it will snap back with vigor as the virus is quickly vanquished.

Federal intervention has been stratospheric over the past decade plus. Coming into the pandemic, the Fed had injected $5 trillion in Quantitative Easing (QE) from the 2008 recession. Now it has added another $3 trillion in the first round of COVID-19 relief and will likely add at least another $2 trillion, bringing the total to a whopping $10 trillion.

The two, the U.S. economy and equity stock markets, will reconnect again. Either the economy will recover, as the stock market predicts, or the stock market will reprice and crash. In the following we discuss the causes of the disconnect and what investors should be concerned about as the disconnect corrects.

Investors should expect a stock market correction. Greed will give way to fear. FOMO (fear of missing out) will become FOLO (fear of losing out). Also, there are plenty of other threats to the economy and stock market including a global debt crisis, cyber crime and terrorism, trade wars and socioeconomic unrest.

References:

  1. https://www.marketwatch.com/articles/the-disturbing-reality-fueling-this-bull-market-51598004009?mod=mw_more_headlines
  2. https://seekingalpha.com/article/4368901-stock-market-will-reconnect-economy-what#:~:text=There%20are%20two%20reasons%20that%20the%20stock%20market,other%20way%20to%20reconnect%20is%20a%20market%20crash.
  3. https://www.barchart.com/story/options/146523/inside-volatility-trading-august-25-2020

Small Businesses Are Dying by the Thousand | Bloomberg

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“Small Businesses Are Dying by the Thousands — And No One Is Tracking the Carnage”

By Madeleine Ngo, August 11, 2020, 9:08 AM EDT

  • They simply close down and never show up in bankruptcy tallies
  • More than half of owners are worried their firm won’t survive

The COVID-19 pandemic has impacted virtually all businesses in one way or another. But the divide between small businesses and large organizations has never been clearer. “Big companies are going bankrupt at a record pace, but that’s only part of the carnage.  By some accounts, small businesses are disappearing by the thousands amid the COVID-19 pandemic, and the drag on the economy from these failures could be huge.”

Massive corporations have the cash and/or borrowing power to stay afloat for many months, the majority of small businesses do not. And we’re beginning to feel the effects.  Economists project that more than 100,000 American small businesses have already shut down permanently since March. This suggests that at least 2 percent of all small businesses are now gone (never to return). And this is just the very tip of the iceberg.

According to a separate study that was conducted in April, as many as 7.5 million small businesses will be permanently shut down if business disruptions continue unabated. More than 90 percent of them will be companies with fewer than 20 employees.

“This wave of silent failures goes uncounted in part because real-time data on small business is notoriously scarce, and because owners of small firms often have no debt, and thus no need for bankruptcy court.”

“Yelp Inc., the online reviewer, has data showing more than 80,000 small businesses permanently shuttered from March 1 to July 25. About 60,000 were local businesses, or firms with fewer than five locations.”

Small businesses are the backbone of the American economy.

“While the businesses are small individually, the collective impact of their failures could be substantial. Firms with fewer than 500 employees account for about 44% of U.S. economic activity, according to a U.S. Small Business Administration report, and they employ almost half of all American workers.”

“Small business attrition is high even in normal times. Only about half of all establishments survive for at least five years, according to the SBA. But the swiftness of the pandemic and the huge drop in economic activity is hitting hard among typically upbeat entrepreneurs. About 58% of small business owners say they’re worried about permanently closing, according to a July U.S. Chamber of Commerce survey.”

Read more: https://www.bloomberg.com/news/articles/2020-08-11/small-firms-die-quietly-leaving-thousands-of-failures-uncounted?utm_campaign=news&utm_medium=bd&utm_source=applenews

References:

  1. https://www.bloomberg.com/news/articles/2020-08-11/small-firms-die-quietly-leaving-thousands-of-failures-uncounted?utm_campaign=news&utm_medium=bd&utm_source=applenews
  2. https://www.washingtonpost.com/business/2020/05/12/small-business-used-define-americas-economy-pandemic-could-end-that-forever/
  3. https://www.cnbc.com/2020/04/14/7point5-million-small-businesses-are-at-risk-of-closing-report-finds.html

Federal Debt has Surpassed the Size of the U.S. Economy | New York Times

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By Matt Phillips. Aug. 21, 2020 Updated 7:48 a.m. ET

The national debt of the United States now exceeds the size of the nation’s gross domestic product. That was once considered by economists a doomsday scenario that would wreck the U.S. economy. So far, that hasn’t happened.

“Economists and deficit hawks have warned for decades that the United States was borrowing too much money. The federal debt was ballooning so fast, they said, that economic ruin was inevitable: Interest rates would skyrocket, taxes would rise and inflation would probably run wild.”

“The death spiral could be triggered once the debt surpassed the size of the U.S. economy — a turning point that was probably still years in the future.”

“It actually happened much sooner: sometime before the end of June 2020.”

“”This is a 40-year pattern,” said Stephanie Kelton, a professor of economics and public policy at Stony Brook University and a proponent of what’s often called Modern Monetary Theory. That view holds that countries that control their own currencies have far more leeway to run large deficits than traditionally thought. “The whole premise that deficits drive up interest rates, it’s just wrong,” she said.”

“At the end of last year, the United States was about $17 trillion in debt — roughly 80 percent of the gross domestic product. In January, government analysts predicted that debt would approach 100 percent of the G.D.P. around 2030. But by the end of June, the debt stood at $20.63 trillion, or roughly 106 percent of G.D.P., which shrank amid widespread stay-at-home orders. (These numbers don’t count trillions more the government owes itself in bonds held by the Social Security and Medicare trust funds.)”

“Economists have long told a story in which debt levels this large inevitably ignited an economic doom loop. Towering levels of debt would freak out Treasury bond investors, who would demand higher interest rates to hand their cash to such a heavily indebted borrower. With its debt payments more expensive, the government would have to borrow even more to stay current on its obligations.”

“Neither tax increases nor spending cuts would be attractive, because both could slow the economy — and any slowdown would hurt tax revenues, meaning the government would have to keep borrowing more. These scenarios frequently included dire predictions of soaring interest rates for business and consumer borrowing and crushing inflation as the government printed more and more money to pay what it owed.”

“But instead of panicking, the financial markets are viewing this seemingly bottomless need for borrowing benignly. The interest rate on the 10-year Treasury note — also known as its yield — is roughly 0.7 percent, far below where it was a little over a year ago, when it was about 2 percent.”

“There’s a debate about whether a large amount of government debt hamstrings economic growth over the long term. Some influential studies have shown that high levels of debt — in particular debt-to-G.D.P. ratios approaching 100 percent — are associated with lower levels of economic growth. But other researchers have found that the relationship isn’t causal: Slowing economic growth might lead to higher levels of debt, rather than vice versa.”

“Others have found that they don’t see much of a relationship between high levels of debt and slow economic growth for rich developed countries.”

“The experience over the last decade has drastically shifted the way economists and investors think about how the United States funds itself.”

Read more: https://www.nytimes.com/2020/08/21/business/economy/national-debt-coronavirus-stimulus.html?referringSource=articleShare

Small Businesses Are Dying by the Thousand | Bloomberg

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“Small Businesses Are Dying by the Thousands — And No One Is Tracking the Carnage”

By Madeleine Ngo, August 11, 2020, 9:08 AM EDT

  • They simply close down and never show up in bankruptcy tallies
  • More than half of owners are worried their firm won’t survive

“Big companies are going bankrupt at a record pace, but that’s only part of the carnage. ”

“By some accounts, small businesses are disappearing by the thousands amid the Covid-19 pandemic, and the drag on the economy from these failures could be huge.”

“This wave of silent failures goes uncounted in part because real-time data on small business is notoriously scarce, and because owners of small firms often have no debt, and thus no need for bankruptcy court.”

“Yelp Inc., the online reviewer, has data showing more than 80,000 small businesses permanently shuttered from March 1 to July 25. About 60,000 were local businesses, or firms with fewer than five locations.”

“While the businesses are small individually, the collective impact of their failures could be substantial. Firms with fewer than 500 employees account for about 44% of U.S. economic activity, according to a U.S. Small Business Administration report, and they employ almost half of all American workers.”

“Small business attrition is high even in normal times. Only about half of all establishments survive for at least five years, according to the SBA. But the swiftness of the pandemic and the huge drop in economic activity is hitting hard among typically upbeat entrepreneurs. About 58% of small business owners say they’re worried about permanently closing, according to a July U.S. Chamber of Commerce survey.”

Read more: https://www.bloomberg.com/news/articles/2020-08-11/small-firms-die-quietly-leaving-thousands-of-failures-uncounted?utm_campaign=news&utm_medium=bd&utm_source=applenews

References:

  1. https://www.bloomberg.com/news/articles/2020-08-11/small-firms-die-quietly-leaving-thousands-of-failures-uncounted?utm_campaign=news&utm_medium=bd&utm_source=applenews

Stock Market Reaction to Expiring COVID-19 Programs | Charles Schwab

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Key Points

  • Stock markets around the world welcomed the COVID-19 fiscal stimulus programs; but now those programs are starting to expire.
  • If not extended or replaced, the fading support for the unemployed raises the risk of weakening economic momentum, turning the V-shaped recovery into a W. 
  • As investors seem to be discovering with international stocks outperforming in recent weeks, there are very different implications for U.S. and European workers.

Stock markets around the world welcomed the COVID-19 fiscal stimulus programs; the passage of the CARES Act in the U.S. in late March coincided with the start of the market rebound.

But now these programs are starting to expire. Key support for the unemployed in the U.S. and Europe is set to fade, raising the risk of weakening economic momentum and turning the V-shaped recovery into a W.

In the United States, an additional $600 per week for the unemployed expires July 31. The average unemployment payout without the CARES Act benefit is only $333 per week. Losing the extra $600 a week is like a two-thirds cut to income for 17 million Americans receiving state unemployment benefits. 

Investing implications

International stocks have outperformed U.S. stocks during six of the past eight weeks, including last week. One of the reasons may be the looming expiration of labor support programs and the different impact this could have on the unemployed in the U.S. compared with Europe.

https://www.schwab.com/resource-center/insights/content/stock-market-reaction-to-expiring-covid-19-programs

A Moral and Economic Imperative to End Racism

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The U.S. “has both a moral and economic imperative to end these unjust and destructive practices” of institutionalized racism. Raphael Bostic, President and CEO, Federal Reserve Bank of Atlanta

“Over the course of American history, the examples of such institutionalized racism are many, and include slavery, federal law (consider the Three-Fifths Compromise our founding fathers established to determine federal representation), sanctioned intimidation during Reconstruction, Jim Crow laws in southern states, redlining by bankers and brokers, segregation, voter suppression, and racial profiling in policing.”

Dr. Raphael W. Bostic, Federal Reserve Bank of Atlanta

“These institutions hurt not only the African Americans they’ve targeted, but the systemic racism they’ve codified also hurt, and continues to hurt, America and its economy. By limiting economic and educational opportunities for a large number of Americans, institutionalized racism constrains this country’s economic potential. The economic contributions of these Americans, in the form of work product and innovation, will be less than they otherwise could have been. Systemic racism is a yoke that drags on the American economy.”

“To be fair, we have made some progress. Legal reforms have erased many of those historical institutions that caused so much pain and violence, and further reform essential for helping end harmful practices is under way in many places. But the legacies of these institutions remain, and we continue to experience misguided bias and prejudices that stem from these stains on our history. These have manifested in the worst way possible—in the deaths of George Floyd, Breonna Taylor, Ahmaud Arbery, Dana Martin, and, sadly, so many others.”

“It is time for this cycle to stop. It is time for us to collectively embrace the promise of an inclusive America, one where everyone can participate fully. We are each being challenged to rise to this occasion through education and action. All of us, especially our white allies, must learn the history of systemic racism and the ways it continues to manifest in our lives today. Furthermore, we all must reflect on what we can do to effect change at every turn.”

“A commitment to an inclusive society also means a commitment to an inclusive economy.”

To read the entire text: https://www.frbatlanta.org/about/feature/2020/06/12/bostic-a-moral-and-economic-imperative-to-end-racism

Dr. Raphael W. Bostic is president and chief executive officer of the Federal Reserve Bank of Atlanta. He is a participant on the Federal Open Market Committee, the monetary policymaking body of the Federal Reserve System.

Goldman Sachs’ Analysis Shows Economic Benefits of Wearing Masks

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“The fate of many lives, not to mention the U.S. and global economy, largely depends on the containment of the novel COVID-19 coronavirus.” Goldman Sachs

  • Cloth face coverings may help prevent people who have COVID-19 from spreading the virus to others.(2)
  • Cloth face coverings are most likely to reduce the spread of COVID-19 when they are widely used by people in public settings.(2)

According to a recent analysis by U.S. investment bank, Goldman Sachs, there’s one simple thing Americans can do that would boost U.S. GDP and make a huge difference to the economy, American jobs, and overall prosperity.

Illustration of people wearing cloth face masks

Goldman Sachs’ analysis, led by its chief economist Jan Hatzius, concluded that “a universal mask-wearing order can improve the U.S. GDP by a huge five percentage points”.  And according to Centers for Disease Control and Prevention (CDC), “cloth face coverings are recommended as a simple barrier to help prevent respiratory droplets from traveling into the air and onto other people when the person wearing the cloth face covering coughs, sneezes, talks, or raises their voice”.

Goldman agrees with the emerging scientific evidence that “face masks are associated with significantly better coronavirus outcomes.”  And, based on the growing evidence, the Centers for Disease Control and Prevention has expanded its mask guidance stating that Americans should wear them in all “public settings and when around people who don’t live in your household, especially when other social distancing measures are difficult to maintain”.

Goldman’s analysis concludes “a national face mask order could increase face mask-wearing by 15 percentage points, reducing the transmission growth rate of confirmed cases from 1.6% to 0.6%”. Goldman concludes that “increased face-masking would substitute for local lock downs and social distancing, which caused U.S. GDP to decline 17% between January and April”.

While anecdotal evidence does suggest strongly that universal mask-wearing can greatly benefit the economy and save lives, it has been difficult to convince Americans of this fact.  As a result of not mandating a national face mask-wearing, there has been a resurgence of COVID-19 inflections and hospitalizations in a number of southern and western states in the U.S.

From a medical expert perspective, “if everyone in the U.S. wore a mask, the coronavirus pandemic could be under control within four to eight weeks”, was conveyed by Centers for the Disease Control and Prevention director Robert Redfield in a discussion led by medical journal JAMA.

In summary, Goldman Sachs’ analysis suggests that the economic benefit from “adopting a national face mask mandate and increased face mask usage” could be sizable, especially when compared with the alternative of a return to broader societal lock downs and increasing COVID-19 infections.

Sources:

  1. https://www.nasdaq.com/articles/goldman-sachs-says-this-simple-measure-can-save-lives-and-the-economy-2020-07-14
  2. https://www.cdc.gov/coronavirus/2019-ncov/prevent-getting-sick/diy-cloth-face-coverings.html
  3. https://www.goldmansachs.com/insights/pages/face-masks-and-gdp.html
  4. https://apple.news/ApjIDbf3mR_u11IZp8goONw

Berkshire Hathaway sells Airline Position

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“In 2008 and ’09, our economic train went off the tracks. This time, we just pulled the train off the tracks and put it on a siding.” Warren Buffett

During their annual shareholders meeting, Berkshire Hathaway Chairman and CEO Warren Buffett explains to shareholders and to the financial markets why the conglomerate sold its entire stake in four U.S. airlines.

https://youtu.be/VDE9ckVnu_M

During the virtual shareholders meeting, Buffett commented that although he believes that they are “well managed”, “The world has changed for the airlines”, to explain why Berkshire sold its stakes in the “big four” U.S. airline carriers in April.

“Fear is the most contagious disease you can imagine. It makes the virus look like a piker.” Warren Buffett

Airlines are receiving government aid to remain operational amid declines of more than 90% in domestic and international air travel.

References:

  1. https://markets.businessinsider.com/news/stocks/warren-buffett-25-best-quotes-berkshire-hathaway-annual-meeting-2020-5-1029160195