Blessing on Wall Street, Blood on Main Street

Blessings on Wall Street, Blood on Main Street

Wall Street has been on a tear recently. Here is a graph that shows the juxtaposition between Wall Street and Main Street

NASDAQ (in blue) against Non-farm Payroll (in red) change year-to-date  

The red line shows the percentage number of non-farm payrolls lost during the Coronavirus. The blue line represents the NASDAQ. As 12% of non-farm payrolls or 20 million Americans were made redundant, the NASDAQ retracts all of its losses during the year and edges up a gain of 1.8% year to date. How is it that millions of Americans are losing their jobs, yet pension funds and 401k’s are squeezing out gains from Wall Street like the Coronavirus didn’t exist?

Investors don’t distrust Wall Street

The end of March was where Investors felt the most pain. Coronavirus turned into this problem that China was facing into a pandemic that encompassed the reality of everyone. As such, retail and institutional investors fled their risky assets, which provided them prosperity over the 9-year bull run into less volatile assets. For some that were sitting on the sidelines, a glaring entry point arose to, as they say, “buy the dip.” With the NASDAQ being weighed nearly 50% towards technology stocks, it is no wonder why it has edged a gain year to date. As we stay at home, reliance on technology is more prevalent than ever. However, this does not explain why they’re up if so many people have lost their jobs?

Wall Street looks into the future; jobs look at the present.

Part of the answer lies in the fundamental nature of stocks: they are anticipatory assets. Investors all around the world look at stocks to what they thing future earnings will be. For example, we can likely all agree that Zoom has had an influx of new customers using their platform, therefore come earnings season they are expected to have good numbers.

Warren Buffet was not convinced.

Not everyone is looking at the drop in asset prices looking to buy. Most notably, Warren Buffet, who is known to be the “lender of last resort,” remains on the sidelines as his war chest nears $140B. Furthermore, he has fully exited his stake in his airline positions, stating uncertainty.

Unfortunately, for many businesses, jobs are an expense liability that does not have the luxury of being deferred into the future – they have to pay their employees now. And in these unprecedented times, there is very little demand for many goods and services that businesses have to offer, so to reduce their expenses, they have no choice to lay off staff. A silver lining can be found, as 18.1m of the unemployed classify themselves as “temporary” – giving hope that employers will rehire them once the Coronavirus is behind them.

However, you probably already knew that. What is the real reason stocks are up?

Swift action from the central banks and policymakers hoping to boost Main Street through Wall Street

Government and central banks all around the world were quick to accommodate the potential economic fallout from the spread of the Coronavirus. With interest rates cut, quantitative easing implemented, and fiscal stimulus injected, the reaction was swift and more directed in comparison to the 2008 Financial Crisis. The question arises – why was it so quickly this time around? Consensus points to the idea that we could point our finger to Wall Street and blame them for the crash, but this time around, it isn’t anyone’s fault. Fiscal stimulus and quantitative easing are more natural to get behind if it is for the good of the people. 

The quick reaction from central banks and policymakers, alongside the easing up on lockdown restrictions across the world, breeds optimism for risky assets.  However, concerns for a second hit to the stock market, with “Goldman predicting a heft drop after a FOMO-driven rally,” with the chance that stimulus is propping up failing businesses.

 Are you buying the bull market?

We recently did a live stream talking about Oil’s potential comeback and the recent rally in the US equity markets. You can watch the recording below.

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