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Why The Stock Market Is Up With 42 Million Americans Out Of Work - YouTube
Channel: CNBC
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The U.S. jobs market is in a
crisis unlike any other in history.
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More than 40 million Americans are
out of work as entire industries
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have frozen during
the coronavirus pandemic.
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The unemployment rate has skyrocketed to
its highest level since the
[14]
Great Depression. Americans have taken
to the streets to protest
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police brutality and racial
and economic inequality.
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Yet on Wall Street, the
picture looks very different.
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The Dow rising by 553 points.
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Wall Street pushed higher to
start a new month.
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Stocks rising yesterday with the Nasdaq
closing at its highest level
[33]
since late February. The S&P 500,
which tracks 500 large publicly
[37]
traded companies in the U.S., surged 40
percent from its low point in
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March through the
beginning of June.
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The stock market and the economy
haven't always moved in tandem.
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But the recent separation between the
two has been especially stark.
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The result is a growing divide
between Wall Street and Main Street.
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If there was any doubt before, there
should be no doubt now that we
[58]
have completely divorced the economy from
the stock and the bond
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markets. Some investors warn the
market is too hopeful.
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As businesses and consumers face
extraordinary uncertainty from the
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pandemic and social unrest.
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I think the market is overvalued.
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I think it's almost impossible to
predict where consumer and corporate
[80]
demand is going to come from.
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Others say the market's right to
keep moving higher as the economy
[84]
reopens and policymakers stand ready
to provide more economic
[88]
stimulus. It doesn't matter
what happens to fundamentals.
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It doesn't matter what
happens to corporate earnings.
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It doesn't matter what happens to
economic growth because the Fed
[98]
will buy what I want to buy.
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That's the mindset of
the market right now.
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So how can stocks move higher with
the economy in such bad shape?
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There's a saying among investors, the
stock market isn't the economy.
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The stock market offers a window
into the economy by tracking
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publicly traded companies.
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But plenty of Americans work for
companies that aren't public, and
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they spend money on goods and
services that aren't directly reflected
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in the stock market. Another key
difference is the stock market tries
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to predict what will
happen in the future.
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While economic data reflects what's
happened in the past.
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The stock market is a bit of
a leading indicator because investors are
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looking forward and doing a forecast
in the stock market is the
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collective forecast of
all those investors.
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When the stock market goes down,
more investors are selling stocks
[150]
than buying them. That means
collectedly, traders are less optimistic
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about the future prospects of
companies earnings and the overall
[157]
economy. It's not reflective of how
the economy is doing today, but
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how the economy and businesses are going
to be doing three, six, nine
[164]
months from now. The financial crisis
from 2007 to 2009 helps
[168]
illustrate how the stock market
is a forward looking indicator.
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The S&P 500 hit a bottom in
March 2009, then rallied more than 60
[176]
percent by the end of that
year as investors became more optimistic
[180]
about the economy. During that
same time, the unemployment rate
[183]
continued to rise, ultimately peaking at
10 percent in October 2009.
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When you go back to March
of 2009, when the market eventually
[192]
bottomed, the news
was getting worse.
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The news wasn't
getting incrementally better.
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But stocks stopped going down.
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Stocks had efficiently priced in what
they thought was worst case
[200]
scenario. It started looking out to
a future that was modestly
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better. Most economic data, on the other
hand, give a look back in
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time. For example, official GDP data
for the first quarter, which
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reflects economic activity in the first
three months of the year, is
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typically released in April.
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It takes government officials time
to gather and analyze information
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about consumer spending, business investment
and other key metrics.
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When we get the first quarter, GDP
numbers rose like, oh wow, they
[224]
didn't look that great. First quarter
about time you get that you're
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halfway through the second quarter.
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So the economic data, by
its nature, is backward looking.
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In the short term, the stock market
is much more volatile than the
[235]
economy. The Dow Jones Industrial
Average might swing thousands of
[238]
points from day to day, even as
the economic data stays the same.
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Plus, it's not just economic
data that moves stocks.
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Factors ranging from geopolitical tensions
to politics to trading
[248]
algorithms can affect market moves.
[250]
At any given point in time.
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The stock market may not be
a good representation of anything other
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than the collective sentiment of the
people that are participating in
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that market. The forward looking nature
of the stock market is one
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reason why stocks have surged in
recent months, even as the economy
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has collapsed. While jobless claims spiked
in April and May, some
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investors expect employment will bounce back
later this year as the
[272]
economy reopens.
[273]
As investors continue to be optimistic
over the gradual reopening of
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the economy. Protests, curfews and
property damage are complicating
[280]
the reopening in many cities, but
not enough yet to change the
[283]
general expectation of increased
business activity through the
[286]
summer. Many traders are pinning
their hopes on positive developments
[290]
toward a COVID-19 vaccine, which
would speed up the economic
[293]
recovery. What's it worth to get a
vaccine or hopes for a vaccine?
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About 35 points on the S&P.
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Look at that, 730 before it came
out and we just went straight up
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from there. I would argue that health
care news right now is more
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important than economic
data and earnings.
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And I think that's going to
be the case for a while.
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And the real reason behind that is
this is a pandemic that will end
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when we feel comfortable going
back out into the public.
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Historically, the stock market benefits
from signs the economy will
[320]
improve even if it's
not happening right away.
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Markets have actually done very well
when really bad news gets less
[327]
bad. And we suspect that we're
going to see incrementally, that news
[332]
gets less bad in the coming
months, in the coming quarters.
[336]
Bad news for the economy or
the average American can also translate
[339]
into good news
for individual stocks.
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The share price of Uber, for example,
surged 9 percent in one day in
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May after the company announced
layoffs and cost cuts.
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When wages are low, which they've
not been doing very well.
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Profits are high.
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Stock market loves high
profits and low wages.
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But the economy doesn't
like low wages.
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You don't have people to buy
your goods and so forth.
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Many stock market investors have
also been encouraged by aggressive
[368]
stimulus from the Federal
Reserve and Congress.
[371]
What we've been able to do is
to help markets return to more normal
[376]
functioning, which has the effect of
buying time, buying time for
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health care professionals, buying time
for governments to respond.
[384]
Since mid-March, the Fed has lowered
interest rates to zero and bought
[387]
trillions of dollars of assets.
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Low interest rates encourage companies
and consumers to borrow money
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at a low cost. The Fed is all in.
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They're telling as strongly as
they possibly can investors that
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interest rates are going to remain near
zero for a long, long time.
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So if you're a stock investor
listening to that, that's a signal
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that, you know, there's there's a
limit to your downside that there's
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a. floor under stock prices.
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Congress has also authorized trillions
of dollars of economic stimulus
[416]
during the crisis. The government has
put almost 3 trillion dollars
[422]
of money into the economy.
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Some of that money is finding
itself finding its way into the
[431]
market. With interest rates and bond yields
set to remain low for a
[435]
long time. Some say investors have no
other choice but to put their
[438]
money into stocks.
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One study even found some Americans
use their stimulus checks to
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invest in the stock market.
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Low interest rates leads
to high stock prices.
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People don't want to put
their money into bonds.
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They want to put their
money into the stocks.
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Another explanation for why stocks
have surged despite high
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unemployment requires a closer look
at the stock market itself.
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A handful of companies really
disproportionately perform and inflate
[467]
the equity markets.
[469]
Five stocks account for around 20
percent of the overall market value
[473]
of the S&P 500.
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Those five companies are Microsoft,
Apple, Amazon, Google's parent
[477]
company Alphabet, and Facebook.
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Four of which have market valuations
above or near 1 trillion dollars.
[483]
These stocks have rallied big time
over the past three months, giving
[487]
a boost to broader markets.
[488]
Think about those companies and how
much more business they're doing
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because we're working from home. That's
been part of the leadership
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that's driven this market. So some
of the drivers of the market's
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performance off of the lows has
been companies that are actually
[501]
doing very well
in this environment.
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Other smaller tech stocks have also
benefited from stay at home
[507]
orders. The share price of Zoome
has nearly doubled over the past
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three months. You can't just say, well,
with did we shut the economy
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down so the market should
be going to zero.
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You have to look at what is
keeping us going during this current
[520]
environment and are
those stocks outperforming?
[522]
And I would offer
up they probably are.
[524]
By some accounts, the gap between
Wall Street and Main Street now
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looks wider than ever.
[528]
Many retail investors have kept their
cash on the sidelines as they
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try to wait out this economic
crisis, meaning they haven't benefited
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from the recent bounce
back in markets.
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There's a lot of people who got
out of this market and are staying
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out, making the assumption that either we
have to test that low again
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or things are actually going
to get worse, not better.
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Many aren't invested in stocks
in the first place.
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Only 14 percent of Americans
are directly invested in individual
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stocks, while 52 percent have some
level of investment thanks to 401K
[555]
or retirement accounts.
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Among those who earn over 100,000
dollars, stock ownership is much
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higher at 88 percent.
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So gains in the stock
market disproportionately benefit wealthy
[565]
Americans. This chart shows how the
longer term link between stocks
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and consumers has been
broken in recent months.
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Consumer sentiment plunged from February through
May as the S&P 500
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rallied. Some say the stimulus efforts
from the Fed and Congress have
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benefited big companies and Wall
Street more than average Americans.
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The problem wasn't just
the amount of money.
[588]
It's how the
programs were designed.
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The money didn't go to
where it was most needed.
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Others warn the stock market
has risen too much.
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Given the outlook for the
economy during the pandemic.
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Stock investors have gotten ahead of
themselves are putting too high a
[601]
probability on a V shaped recovery.
[605]
The economy and the markets have
gone through other phases where
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they're not in lockstep.
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Take, for example, in 2018, when
quarterly GDP growth reached its
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highest level in nearly four years.
[614]
Yet markets stumbled because of
uncertainty over trade policy.
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Still, in the long term, markets
and the economy generally have moved
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in the same direction as they're
both affected by factors like
[624]
corporate earnings, productivity and
changes in demographics.
[627]
The question is whether the current
disconnect is the start of a
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longer lasting trend.
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While the economy drives corporations ability
to earn the decision as
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to what those earnings are worth are
driven by humans and humans make
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emotional decisions and multiply that by
the tens of millions of
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investors that are making
emotional decisions every day.
[648]
So you have to put
all those things in context.
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