This screenshot from Jim Cramer's show on CNBC sums up best the disconnect between the stock market and the actual economy. The stock market is having a resounding recovery, while the unemployment rate in US is reaching a level not seen in the Great Depression. So what can explain this disconnect and why is the stock market soaring while people are losing their jobs and companies are declaring bankruptcy? Will we have a "V" shape recovery where the stock market will recover to it's previous high in a few months time? Let us examine the possible reasons why the stock market is doing so well despite the men on the streets are suffering.
Reason 1: Quick Fiscal and Monetary Action from Governments
If you compare the reaction of the US central bank during the 2008 financial crisis and the 2020 COVID-19 Pandemic, the US central bank is much swifter and much more hard hitting. During 2008, the US central bank slowly reduce interest rates to zero before starting out on quantitative easing after the interest rate has been reduced to zero. In this case, the US central bank reduced the interest rate to zero almost immediately and promised "unlimited" quantity easing measures. The market is suddenly flooded with huge amount of zero interest loans which investors can tap on and these money found their way into the stock market. The fiscal reaction from the usually partisan US government is equally swift this time round as the government moved a $2 Trillion dollars rescue package as compared to the $800 Billion dollars package passed during the 2008 financial crisis. During 2008, the government also took a many weeks after the collapse of Bear Sterns to get money into the hands of the US public.
Governments around the world also took swift actions in bailing out companies and providing support to prevent too many people losing their jobs and hence the shock of large scale closure of many parts of the economies were buffered for now. However, the current measures are estimated to be insufficient to last through Aug and the world will need new jolt of stimulus if the world is unable to get their economies back to some resemblance of normality.
Reason 2: More Data and Reopening of Economies
During the COVID-19 pandemic, some of the biggest market moving news are related to the development of cures, vaccines and the "curves" of the progress of the pandemic. When The situation in China, Spain and Italy started to get progressively better, investors have now a better idea how long the period of a COVID-19 lock down be like and how fast the economy can be restarted. This gave some certainty as compared to the early days of the outbreak when nobody has any idea how long the outbreak can last and how deadly the disease can be. The Trump administration, has been cheer leading positive outcomes on when the whole pandemic can be controlled, and has been pushing for an early re-opening of the US economy, even though the pandemic has not be controlled yet. the success of China and South Korea also gave investors hope that as long as sufficient measures are put into place, life can get back to normal with certain precaution in place as scientists around the world races to develop a vaccine.The Worries
The biggest worry is the possibility of a second wave of COVID-19 cases like what we have seen in Singapore and a second wave of shut down has to be instituted, crippling the economy again. This is especially worrisome of US, where the pandemic has not seen their peaks in parts of US and the largest economy in the world may be forced to shut down large portions of the country again, to combat the virus. The stock market as of now, hasn't taken into consideration of a possible second wave, and hence seem to be predicting a "V" shape recovery rather than a more possible "W" shape in the case a second wave hit. Warren Buffet, in a recent interview during the annual general meeting of Berkshire Hathaway gave an insight in what the "Oracle of Omaha" thinks, when he sold all his airline stocks and indicated that he is keeping most of his holdings in US Treasuries. When asked about how he thinks this recession will develop, he has on three words "I don't know", but he is optimistic that US will survive this period, stronger. This is worrisome as the 89 years old master has lived through all the major market crashes of the 20th century and he is unable to give a definitive answer as how the stock market will play out in response to this pandemic.
Portfolio Strategy and Performance
The portfolio performed well and made 7.5% return during the month of April. The energy fund did extremely well and our well-timed purchased have yield us handsome returns in this area. Even though the portfolio has moved towards a more aggressive position in recent weeks, the portfolio is well diversified to position for both a possible "W" or "V" shape recovery. The trickier part will be the second fall that might or might not happen as a result of a second wave of the pandemic. I believe that the economic impact of the second wave might be as bad as the government stimulants may have lost the majority of the impact and may be reluctant to pump in more money as soaring government debts while trying to combat the pandemic may be unsustainable. In any case, the world will probably be more informed and better prepared should the second wave hits and it will not cause a mass panic in the stock market as what we have seen in March. However, a prolonged period of lesser economic activity may lead to companies falling into bankruptcies and hurting the stock market. So, the portfolio strategy is still to keep a good proportion of safe investment, while we tranche in our investment over time. Meanwhile, I will continue to adjust the portfolio as the situation develops and to flow with the latest development on how the pandemic will pan out.
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