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Stock Market Rally Looks Past Our Crumbling Economy

May 11, 2020
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Monday Morning QB - Market Observations

  • S&P 500 Rallies… Another Strong Week of Gains
  • Economy Loses 20.5 Million Jobs in April… Worst Month Since the Great Depression
  • Too Many Unemployed Americans but Many Forecasted Worse Scenarios
  • Reported Earnings Have Outperformed the Abysmal Predictions
  • Deficit Spending Soared in April
  • A Slight Ease in American/Chinese Tensions

Monday Morning QB - Market Performance:

U.S. stocks recorded substantial gains for the week as investors found encouragement from the draconian predictions proving false. Yes, our economy is in bad shape, but many are finding comfort, knowing that things could have been far worse.

For the week, the NASDAQ added +6%, while the Dow Jones Industrial Average added +2.6% to close at 24,331.

The big week for the NASDAQ Composite Index was enough to push the index into positive territory for 2020 and back to within single digits of the index’s all-time high.

By market cap, the large-cap S&P 500 rose +3.5%, while the mid-cap S&P 400 added +5.4%, and the small-cap Russell 2000 gained +5.5%.

An Unemployed America

The Friday jobs report, in the oddest way, was good news. It confirmed what we already knew, but it was not as bad as most expected.

The headline number was, however, shocking!

Over 20.5 million jobs were lost in April, skyrocketing the unemployment rate to 14.7%. We have not seen this many Americans out of work since the Great Depression of the 1930s.

It is difficult to comprehend how horrifying this number truly is. Consider this.

The number of monthly jobs created during each of the last two administrations - our current and previous President's term- was amazing. (A fact that both political parties can appreciate).

Yet in one month, due to a virus, every job created since President Obama took office is gone!

It is hard to fathom that just a few months ago, the American economy was pumping out jobs, and the unemployment rate was around a 50-year low.

An Unintended Consequence of the Government Stimulus Package- a Dilemma

As our economy begins to awake from its slumber, businesses have run into a difficult problem to getting back on track. Some workers are making more money on unemployment.

Part of the Government assistance packages, implemented to combat the effect of the coronavirus, is an additional $600 per week of unemployment benefits allotted through July.

The Government is, in effect, currently paying workers more than many business owners can afford to pay. 

People are going to do what is in their best interest. Times are tough, and if your family is making more money collecting unemployment checks than working, no one can shame you for staying unemployed.

I spoke to two business owners last week that are genuinely concerned about the fate of their businesses without workers to work.

The double whammy is both business owners took Government assistance through the PPE loan program. Without boring you with details, the loan is forgivable only if the money is used to keep people employed.

Do they offer to pay the workers more than the job requires? Do they try to entice workers to give up the extra $600 per week the Government has added to their unemployment benefits? Paying workers above their pay grade is not a means to success.

Will workers come back for a higher wage only to have it cut at the end of July, a structure that matches the payout of the government assistance program? What about additional childcare costs, if even available, if parents go back to work?

What is on the line, however, is the survival of businesses.

Those “lucky enough to survive” business owners will have to potentially pay back a loan rather than having the loan forgiven. Paying back the debt is not a requirement if used to keep Americans employed, not just to keep the business afloat. A struggling business does not need an additional expense because his employees refused to come back to work. 

What if the workers who choose to remain at home, only to have their employer's business fold, have no job to return to at the end of the assistance program in July?

There is a true dilemma for both the employer and for the worker - an unwelcomed moral hazard created from the best of intentions!

Down But Not Out

The stock market appears to be the barometer of hope! Studies show that things seem less harmful when they do not sneak up on you- no shock value!

Everyone knew that the economic numbers were going to be horrific for at least a few months to maybe even a few quarters. Now that the economic data has started to come into the light, some solace can be found from “less bad.”

As Americans, we tend to be an optimistic group, in general. So, when we hear bad data not reaching the worst predicted scenario, we project a quicker recovery.

After all, the economic data shows us what has happened in the past. The stock market is forward looking, reflecting hope. 

To Reopen for Business or Not, Now That is the Million Dollar Question

Optimism can prove fickle. The focus will now turn to what happens as the economy continues to open in stages, state by state.

We understand the virus will have flare-ups. The hope lies in the numbers spiking in small pockets but contained with a more prepared health care system.

The pressure on elected officials will be immense. Should some states navigate the reopening waters successfully, the pressure on the governors who continue to keep their citizens in lockdown will result in a frustrated voting public.

The early adopters, the first states to attempt to get back to normal, should they fail, yikes! A strong return of the virus, more dead, and a new media frenzy pointing to the governor’s failures will be unrelenting.

The stock market will adapt in real-time as the picture becomes more apparent. Does anybody wish to trade places with their elected officials right now?

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal,,,,,,,, Eurostat, Statistics Canada, Yahoo! Finance,, Chaikin Analytics,,,,,,, W E Sherman & Co, LLC)
Hayden Royal is an investment adviser registered under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. The information presented in the material is general in nature and is not designed to address your investment objectives, financial situation or particular needs. Prior to making any investment decision, you should assess, or seek advice from a professional regarding whether any particular transaction is relevant or appropriate to your individual circumstances. This material is not intended to replace the advice of a qualified tax advisor, attorney, or accountant. Consultation with the appropriate professional should be done before any financial commitments regarding the issues related to the situation are made.
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