The world is falling apart around us with almost unprecedented civil unrest. Yet, the stock market continues marching upward. What gives? It comes down to expectations and optimism.
First, the overly optimistic expectation is that the economy is going to have a V-shaped recovery. I call it a “flip the lights on” expectation. Wall Street believes that once the economy reopens, everything is going to return to normal. I think that it is unrealistic at best. Over 40 million people and still counting are displaced from employment. Besides, we don’t know the actual damage that has been done and will be done. We don’t know the total number of businesses that are gone for good or are in the process of that being the case. Keep in mind that the market didn’t think the coronavirus was going to be a big deal as it went up during the first part of February.
Second, the market reacts negatively most of the time when the economy reports terrible economic numbers or a drop in corporate earnings. The market was not caught by surprise. The stock market expects for there to be bad news. Plus, the expectation of reason number one that everything will get back to normal overrides everything.
Third, the stock market is run for the most part by computerized trading, which has no emotions.
Fourth, the stock market has never really reacted to civil unrest. I expect if it were to get worse, there might be a reaction (as if it is not bad enough already). Plus, the market looks at it as a short-term event. The expectation is that the rioting and crisis will soon subside. Remember, the market is heartless.
Finally, this proves we have been in a Fed-induced stock market bubble. During a bubble, the stock market disconnects from reality. It looks like we have returned to that disconnect, at least temporarily.
I want to be optimistic. I also want to be realistic. I wouldn’t get too overconfident listening to the talking heads forecasting the worst is behind us. Unfortunately, I think that it is going to be a long road to recovery that is full of surprises. You don’t sustain the type of damage we have suffered in the economy and walk away from it without any problems. When the stock market wakes up with a hangover from the party it threw the last two months, I wouldn’t want to be around for the aftermath.
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