The U.S. is officially in a recession according to the National Bureau of Economic Research (NBER). It normally takes nine months to a year for the NBER to call a recession. At three months, this is the fasted recession call in their history. Despite this, stocks have not been this expensive for over 19 years.
There are a few reasons for this. First is the fact that there are little alternative investments that provide much in the way of returns. Second, the Paycheck Protection Program (PPP) has flooded the markets with liquidity. There is also an army of inexperienced new stock traders playing the markets lately. FOMO (Fear of Missing Out) trades followed. Jobs numbers were better than expected last week. Finally, the stay at home orders have been lifted in most areas.
Unfortunately, history shows that there are often market spikes early on in a recession. The fact that there’s no alternative to equities should be a cause for concern rather than a buy signal. The PPP funding will run out in either July or August. An influx of inexperienced investors is often detrimental to long term market performance. Reported job numbers were found to be inaccurate, with unemployment rising to near 16% rather than the 13.8% originally reported. Finally, Coronavirus is back… ICU beds are near capacity in Arizona. The Arizona Dept of Health Services is now admitting they over reported the number of available beds beginning April 8th.
The current recession began in February. This is before the pandemic and shutdown. Yet the market rebound continues. The charts below illustrates how disconnected the market is from reality. Hertz Car Rental up 311%. Party City up 95%. Tupperware Brands up 105%. Michaels Companies up 70%. The one thing these companies have in common is that they are all bankrupt.
There are two things to keep in mind right now. First, the stock market is not the economy. Second, investing needs to be a long-term engagement. We should sell near the bottom of a market nor should we buy near the top. Of course, it’s always impossible to tell when either has occurred.
As always, we need to remain invested for the long-term. That does not mean we should ignore current trends. Stock prices are fundamentally a product of supply and demand as well as future projected earnings per share (EPS). We know that demand is high, but earnings are not projected to recover for up to five years in some industries. We need to remain vigilant given the available data.