abandon all hope

Abandon All Hope

The stock market recently has been riding on hopes. In 2019, it was hopes of a trade deal. In July, hopes of a second stimulus. Hopes of a vaccine are driving the market in November. Generally, this is a good aspect of the stock market. After all, you buy a stock for its future returns.

But by taking this forward-looking view, the stock market underestimates the past and present. Mr. Market is a distracted driver. He’s too busy looking for the exit ramp that he completely misses the deer in the road.

In 2019, we were promised a trade deal with China roughly 1,000 times (approximately). Stocks went up every time. When it became apparent that there was no trade deal, did stocks fall back to their previous levels? No. Stocks remained high.

We received the first stimulus checks in April–well, most of us anyway. That pumped a lot of money into the economy and helped bring us out of the March rut. A month or two after that, talks began for a second stimulus. Every time they announce that a deal is close, stocks go up. When nothing got signed, did stocks fall back? Nope. Stocks remained higher than before.

Last Monday, Pfizer and BioNTech announced they were making astounding progress with the COVID-19 vaccine. Maybe soon we’ll be able to see our families again and go to football games.

This Monday, we got the same news, but from Moderna. The vaccine trials have been successful. This brings more hope.

Now, this is a great thing. Hopefully, this will bring things back to normal. People could actually get out of the house and go to an indoor concert again.

My question is this: what happens to the stock market if everything goes back to normal?

When it’s time to put your cards on the table, will hope be enough?

Let’s look at what the data says about the state of our economy.

Unemployment

unemployment

The unemployment rate in October sits at 6.9%.

Good news: October unemployment is down from the April high.

Bad news: 6.9% is worse than the peaks of three recessions.

The peaks from every recession since 1948 are as follows:

Year of RecessionPeak Unemployment Rate
19487.9%
19536.1%
19577.5%
19607.1%
19696.1%
19739.0%
19807.8%
198110.8%
19907.8%
20016.3%
200710.0%
202014.7%
Source: Dollars and Drams

The peak of this recession was 14.7%–higher than any unemployment rate we’ve experienced in the past 70 years.

The unemployment claims data looks even crazier than that.

Source: Dollars and Drams

Unemployment claims peaked in May 2020 at 27.6 million. Prior to 2020, the highest number of total claims came in 2009. That number was 7.2 million.

Here we are: 8 months after the lockdowns began and 6 months after the peak, and we’re still higher than 2009.

So how does unemployment affect the economy? Glad you asked.

Gross Domestic Product

Businesses and people are an interlinked system. When people don’t work, they don’t make money. When people don’t make money, they can’t spend money. And when people can’t spend money, companies report lower or negative net income. If companies lose enough money, they have to lay people off.

Can you see how this might cause some problems?

The total measure of the United States economy is called the Gross Domestic Product, or GDP. Essentially, this is how much money people spend on American goods.

How has the pandemic affected GDP?

Right as the pandemic hit, the economy went straight down. When looking at history, it may not seem like a big drop. The last time we were at these levels was 2017–not that long ago.

The scale is what makes this notable. The peak U.S. GDP was in Q4 2019. Q3 2020 was lower than that by $670 BILLION! That could pay a lot of employee wages.

Now you’re probably saying, “If the economy is in such rough shape, why is the stock market hitting all time highs?”

Here’s why:

Federal Reserve Intervention

The United States Federal Reserve is keeping the economy afloat. These are the people that literally print the money that we use. They are printing money and buying corporate bonds. This does two things: (1) it adds liquidity to the markets and (2) it increases inflation.

Both of these things lead to an increase in asset prices. Don’t believe me? Check this out:

Source: currentmarketvaluation.com

The Federal Reserve is carrying the economy. Since the pandemic hit, the Federal Reserve has purchase more than $3 TRILLION worth of securities. An injection like that is sure to increase stock prices, but how long can it last?

Conclusion

Intervention of this magnitude has never been done before. How will it affect the economy going forward? What happens when/if they unwind the balance sheet?

Perhaps everything will be just fine. The stock market may take a hit, but that’s natural. It will always pick back up. But maybe things have permanently changed.

My advice: don’t sit around waiting to find out. Make the best of this opportunity and be prepared for whatever may happen.

Abandon all hope.

Hope won’t help you. Action will.

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