On the Other Hand
From Lee Sherbakoff,
The Nalls Sherbakoff Group, LLC.
Dear Friends,
On one hand, over a nine-week period, there have been 38.6 million first-time claims for unemployment insurance (through May 21). It’s by far the worst number of layoffs we’ve ever seen, and it is disheartening to see.
On the other hand, during April, the Dow Jones Industrial Average and the S&P 500 recorded their best monthly gains since 1987. As of May 20, the S&P 500 is just 8% off the most recent high and at one time it was down over 33%. It’s an incredible disconnect between the financial economy and the real economy.
How might we explain the disconnect?
The Fed’s unlimited firepower has not been enough to prevent a debilitating economic decline, but its unprecedented steps have kept an economic crisis from morphing into another financial crisis, with a massive amount of liquidity and a promise of more support aiding stocks.
Further, government stimulus of over $2.5 trillion is helping sentiment. Talk of a vaccine or treatment that would end the pandemic has been a factor. And, we believe, investors are looking to 2021, when there is the anticipation that corporate profits will turnaround.
Of course, the outlook is very uncertain. Have investors been too optimistic?
Additional government spending and support may be needed to jumpstart economic activity, as Powell alluded to in a recent press conference. Deficit hawks may cringe at talk of new spending and new programs haven’t been problem-free. So far, fiscal stimulus has received strong bipartisan support.
Meanwhile, the reopening of large swaths of the economy may or may not go as planned.
Another wildcard will be consumer behavior. Prior patterns are unlikely to return to pre-crisis behavior, at least right away, and social distancing at restaurants, airlines, and industries that require person-to-person interactions could limit activity and sales.
Bottom in sight? Who knows?
Yet market action suggests some type of economic bottom may be in sight. Think of it like this: The level and the direction of stocks is the equivalent of the collective wisdom of millions of small and large investors.
They are not simply opinions, but real people and institutions that buy and sell equities, effectively putting their money where their mouth is, as they say. Interestingly, for every seller of stocks there is a buyer. The seller may think the price is overvalued while the buyer may think the price is undervalued.
No one has a crystal ball. No one can tell you where stocks might be at the end of the year. There are too many unknown variables. Those who make forecasts are simply offering opinions.
We understand the uncertainty facing all of us. We are grappling with an economic and a health care crisis. It’s something none of us have ever faced.
We have addressed various issues with you, but we have an open-door policy. If you have questions or concerns, let’s have a conversation. That’s what I’m here for.
The Nalls Sherbakoff Group, LLC
DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of, or reliance on the information. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.