A typical recession does not just wipe out the economy but cleans out all bullish investments and gets everyone into cash. This time, it appears to be different. Despite mounting deaths and climbing unemployment numbers, the stock market has begun a rally that defies the standard template of a recession.
The bulls credit the Fed and its massive stimulus and “prevent a major recession at all costs” attitude. But, the Fed can only do so much. If people don’t return to work, don’t travel, don’t go to restaurants and so on for another few months, the Fed will run out of weapons to buoy the market and then what happens?
Future Wealth’s View
What we are going through the past months, is not just a question of survival but, really, is a philosophical question.The very idea of social distancing is at odds with the fact that people need to work together to revive the economy. There have been natural disasters, wars, diseases etc. that have wiped out more people than the corona virus. But few of them have given society the impossible choices that corona virus has. This virus has created tensions between the rights of the individual and that of society. Consider the panic buying of toilet paper or other essential commodities. The people who are hoarding do it for no other reason than their own well being while depriving the society at large access to basic necessities.
What has all of this got to do with the stock market? Unlike human behavior, the stock market tends to behave on fundamentals. At least, until now. Less than a year ago, the yield curve inverted. Of course, most ignored it. The yield curve had been a reliable predictor of an upcoming recession within 12 to 18 months. We highlighted its significance in the article on Nov 19, 2019 titled “Is it wise to question the yield curve?”. Link is here: https://futurewealthllc.com/
What we have not learnt is to pay attention to facts and fundamentals. As the book – The Phaedrus (A chronicle of conversation between Socrates and Plato) states “Things are not always what they seem; the first appearance deceives many; the intelligence of a few perceives what has been carefully hidden.”