The record setting Bull market in stocks since 2009 had reached a parabolic climax in February. The 1st quarter culmination was particularly amazing in that the US economy had been slowing for months and the growing Covid pandemic had already shut down China and begun moving into the rest of the world. When the pandemic exploded onto the scene in the US in March, the adage “the bigger they are the harder they fall” came to mind as stocks fell faster than any Bear market in history. The good news is the “the harder they fall the bigger the rally” converse is also true. In fact, the only thing better for stocks than bad economic news is even worse news when it come to the job market. Unemployment claims rose an astounding 23 Million from mid March to early May during the heart of the Government mandated shutdown of the economy. More surprising to some was that such bad news on the job front was good news for investors. When Unemployment is low – full employment – stock values are vulnerable. Likewise, when Unemployment is high, it’s a good time to open your Robin Hood account and Buy stocks. The higher unemployment the stronger the ensuing stocks gains. In the age of zero bound interest rates and unlimited printing of money, it’s logical if not required that maximum Federal stimulus and liquidity will be added to the economy. During the bursting of the mortgage bubble in 2008 and the financial crisis that ensued, massive Government intervention along with Central Bank money creation was applied to prevent a deflationary Depression. As Unemployment rose above 8% the stock market bottomed and began an historic Bull market run. The Bull continued for years as Unemployment began receding from its Recession level peak of 2010.
During the recent record transition from Bull to Bear and back to Bull market again in March and April of 2020, it was again a great time to invest in stocks as Unemployment leapt higher. While 14.7% Unemployment is near Depression levels, it likely grossly understates the job market trauma as millions on the current payroll are not working. Many idled workers are being retained with Government assistance under the assumption that they will be needed soon. Those not working may have exceeded 20% at the peak, but as long as the Government sends out payroll protection money, the pain levels can be tamped down until the economy warrants everyone returning to work. For now, uncertainty means more safety nets, handouts and rising cash to invest. A record number of jobs were created in June, knocking official Unemployment down to 11%, but there is a long way to go and plenty of time for stimulus to keep supporting the economy and stocks.
With the delay in monthly Unemployment reporting, it’s more precise to look at weekly metrics of jobless claims or employment alongside the relative change comparison of the stock market. Looking at the outsized equity Bull markets beginning in 1982, 2009 and now 2020, the time to invest for the economic turnaround was when continuing Unemployment claims had risen above 4.5 Million or more than a 50% year over year rise in claims (not shown here). The latest indication was late March for Bulls to invest. Despite the all time record monthly gains in jobs the past 2 months, Unemployment at 11% remains at Recession levels and almost guarantees continued Government Trillions will be added to business and personal pocket books along with an extremely accommodative Federal Reserve Bank that will not allow interest rates or credit spreads to rise.
With 40 to 50% rallies in the various stock indices over the 11 week period ending in June, faster gains than ever seen before, it’s easy to assume that stocks are overvalued and due for a deep correction? Yes and no. Stay at home themed technology stocks are overbought, yet tremendous amounts of excess cash are on the sidelines with surprisingly high levels of pessimism about this Bull market. Tech appears quite frothy having led this Bull and increasingly dominating the entire stock market weighting. Tesla, essentially a tech company today, just became the largest valued car company in the world, surpassing former world beater Toyota. Tesla just beat expectations producing 90,000 cars in the 2nd quarter, while Toyota typically makes 25 times that amount in a quarter. Tech revenues in general are growing rapidly, but enormous sales gains for the next year or two are already being priced into many of these stocks. On the other hand, Banks, travel and cyclical stocks appear extremely cheap if the economy is going to someday vanquish the fear of Covid. Furthermore, as long as Unemployment is near Recession levels and the suppression of this pandemic is uncertain, we can be assured the Government and Central Banks here and abroad will keep adding record liquidity and stimulus that allows for above normal stock market valuation multiples. The current US stimulus is already equivalent to almost half of our annual GDP. After 40 to 50% stock index gains, a 10 to 20% correction in this new equity Bull market can occur almost any time. However, Buying the dips is more important than selling the rallies from an investment perspective. The momentum of this Bull market has actually kept a record amount of scared cash on the sidelines with a record savings rate. Just as the March collapse was too rapid for investors to Sell into the panic as they normally would, the ensuing Bull market has been too quick to allow good opportunities to Buy. The current rise in Covid cases has created some uncertainty and stalled stocks in June which could worsen in July. Given the depressed economy and countervailing stimulus that will continue being applied until Covid is under control, we would continue look for Buying opportunities with any 2 to 3 day market panics, especially when corrections move beyond 10%.