Save Your Tears For Another Day

I saw you dancing a crowded room; You look so happy when I'm not with you

But then you saw me, caught you by surprise; A single teardrop falling from your eye

I don't know why I run away; I'll make you cry when I run away.

Take me back 'cause I want to stay. Save your tears for another day.

"Save Your Tears" - The Weeknd

Imagine walking a small, hyperactive dog through the park on a leash.

You may move in one steady direction at any given time, but the little dog will be all over the place. Going way ahead and chasing a squirrel. Sprinting back behind you to bark at something. Going side to side, sniffing the traces of other dogs that were there prior. Although the patterns of the dog can change by the second, one thing always will remain true. Due to the leash, the dog will always be forced to move in the direction you are moving in the long run. It really doesn't have much of a choice as you're bigger, stronger, and can overpower the collar. The dog may even choke itself trying to go where it wants, but ultimately it will obey.

This analogy is the best one I've ever heard of the relationship of the economy to the stock market. No matter any assertion otherwise, the economy is not the stock market and the stock market is not the economy. Just like the human and the dog are not alike. They can move in very different ways from each other in sometimes violent and abrupt spurts that can make little logical sense. But ultimately, in the end, the economy will determine the ultimate direction of both parties. And right now the economy is still very sick, and we're still very much waiting to see if things get worse before it fully heals.

We recently crossed 27,000 in the Dow Jones Industrial Average and now the S&P 500 is close to where we were at the beginning of the year. This has all been done at a breakneck pace, in the midst of unprecedented times, and all while 40 plus million people are currently unemployed. The country is just beginning to emerge from quarantine, but into enormous social unrest. The only thing consistent throughout all of this is uncertainty. More so in this rise than even the terrible fall that preceded it, these market moves are unprecedented in modern market history. I have no problem admitting I never expected to be back here this quickly.   

So how did we get here? Should we care? Is it for real or will it all fall apart?

Well.....

We've all experienced ways this pandemic has changed us since it started. My most blatant is that I can no longer bring myself to read fiction. Ironically, but not by accident, I was 1/3 through "The Grapes of Wrath" in early March before everything changed. I still haven't had any interest in picking it back up yet. I think part of that is because in reality we're living in our own dystopian novel and truth is stranger than any fiction. But the other part of it is that there's so much content out there right now about what's going on; it's turned this "Buddhist monk searching for his Nirvana," into a knowledge masochist. 

World market history as it related to World War 2. The transition of world power from the Dutch to the English in the 17th century. Big debt cycle analysis and case studies. McCarthyism. I've been insatiably ingesting it all and then some. History never repeats itself, but it often rhymes. And the rhythm when it comes to this situation is as fascinating as it is scary. Combining that with a constantly changing news cycle, economic data, technical and fundamental analysis, and a never ending flow of market related content; all while trying to wade through the enormous amount of purposeful misinformation out there about it all has been daunting at times, soul crushing in others.  We are all dealing with our own levels of personal dystopia during this whole ordeal, and I hope for your sakes you have turned inward at times to distract yourself from it all. So what I'm going to try and do is create some bite sized points with a some blunt, in between the lines interpretations of it all with some tie togethers at the end.

With all that in mind, please understand all of this is an oversimplified summary of it all. There are tons of nuances that I'll miss and data that I won't cover. I'm simply trying to allow you to get a finger on the pulse of the reality that I'm living in, sometimes too intensely, on a day to day basis. So let's get started:

What are the main factors for the rise?

Medical:

Positive: At first the market was reacting positively from the relative flattening of the curve in New York and New Jersey, the epicenter of the crisis in this country. The market started reacting positively well before the death rate peaked, but the data suggested that the infection rate was slowing due to the quarantine requirements and social distancing measures put into place, as particles found within breath is the easiest way to spread the virus. It wasn't that things were great, the market simply cared that things were "less bad" than before. A classic market reaction.

Negative: The market is clearly New York centric, but it's practically ignoring the fact that rates have begun rising in other areas of the country, even while restrictions were being eased. It is also ignoring inconsistencies and problematic contradictions in data reporting in dozens of states. Not to mention the social unrest that is clearly boiling over in some areas of the country that could help spread and sustain the infection rates, further exacerbating the problems into the fall, colder temperatures, and flu season.  

Positive: The most recent gains have been very closely tied to "breakthroughs" in vaccine development. Although most companies will say that a vaccine is months, if not a years, away; the idea that so many companies are on full throttle searching for ways to combat the virus have been comforting to the market as a whole. The market is basically saying it doesn't know where it's coming from, but thinks a vaccine will arrive.

Negative: The first major announcement that took the market by storm was by a relatively inexperienced company that has never brought a successful drug to market in the past. Data was released to the press in a very untypical fashion, without peer review, and with extremely anecdotal information that wasn't in a typical scientifically controlled setting. Most reputable companies working on this vaccine are very cautious and realistic on the expectations on a timeline for full development, testing, production, and distribution of vaccines. Most of the moves from the market have been off of the elation on loftier claims by lesser known companies.

Summary: "Less bad" is good and very much rooted in market history as a catalyst. More hope is good for obvious reasons. Dozens of smart companies working together to find a solution is great. The market seemingly over relying on the most positive spins is concerning and simply cannot be counted on as a definitive.  

The Fed:

Positive: The Fed very quickly realized the severity of the situation and "brought a bazooka" out to fight the problems. They confronted liquidity concerns though unprecedented levels of asset purchases and credit easing and just the overall attitude and communication to the market of "whatever it takes" has definitively created market confidence.

Negative: There aren't a lot of short term negatives here other than it doesn't address the main problem with the situation, which is the virus itself. Nothing will fully bring back the economy until the science eases the burden of the problem. And what the Fed did was simply buy more time while that happens. But a Fed life preserver alone cannot be the foundation of a strong economy going forward. An economy needs room to breathe on its own, and the Fed is mainly a life support machine currently.

Summary:  The Fed "put" has been essential to confidence in the market. Longer term effects will become apparent at some point, but for now they did what they needed to do, and it's been successful as it gives a foundation for market confidence. 

Government aid:

Positive: extended unemployment benefits and "small business" lending programs have been largely efficient despite the speed in which they needed to be rolled out. They have not really been much of a catalyst for the market rising specifically, but laid a foundation for it to do so. Much like the Fed, these programs are a "bridge" to get to the other side of this mess. With 40 plus million people unemployed, the spending gap needed to be filled in the interim, and it's largely serving that purpose.

Negative: These benefits will run out. According to a CNBC poll, 90% of those unemployed believe their job is coming back post pandemic. Not even close to reality. Crisis', by definition, speed up existing trends. Existing trends show paring of a work force due to lower demand and technological efficiencies. It's a numbers game and 90% of jobs coming back seems unrealistic. Approximately 1 in 5 working age Americans has a $0 net worth. This is a potential demand disaster if aide ends and jobs do not return en masse.

Summary:  The gap these programs filled has helped uphold spending in general. They have helped keep the unemployment rate from being much worse, and based on the surprise job numbers from last Friday, it's worked better than expected. They have helped businesses stay afloat during times that have punished them unmercifully due to no fault of their own. They were necessary and proper. But even more so than the Fed, these measures are keeping the body breathing by hooking it up to a machine. The body of the economy cannot and will not get better while on it. This will take an enormous amount of time to achieve. It's almost certain more spending will take place in the short term, as we're in an election year. But one thing is for certain that I cannot seem to find many acknowledging in any commentary or analysis: Spending and true economic activity is masked under these programs. When they stop, the true extent of evaluating the pain begins. Unemployment insurance starts ending at the end of July. Small buisiness loan decisions regarding the PPP program will start coming sooner than later as well. The market seems to be reacting to the economy as if it were a sick patient assuring their doctor they feel fine. Any patient feels great under morphine; but morphine cures nothing.

Further, growth had been slowing going into this situation despite rising government deficit and spending levels. From the first full year of recovery from the Great Recession in 2010 where the US budget deficit was $1.3 trillion to when it bottomed in 2015 at $440 billion, The US Gross Domestic Product (GDP) expanded between 1.55% and 2.9% per year. As we started moving up in 2016 at $585 billion to 2020's pre covid deficit of $1.080 trillion, we never got above 2.9% and were at 2.3% in 2019. 

Considering these stimulus programs (including Fed loans) are already in the $3 Trillion range in mere months, the quick jolt is, without a doubt, astronomically positive to the economy. But the true nature of economic activity is almost impossible to gauge due to this. Throwing gasoline on a log fire will create a really impressive short term effect too. But what it won't do is keep that fire burning sustainably on its own.    

Economy opening back up:

Positive: This is obviously a good thing. State by State procedures differ as the virus clearly is going to effect more populous areas/ areas where people originally entered the country after being infected overseas. But the Center for Disease Control released a memo recently which indicates that the virus isn't easily transmissible through touching objects. This is an under emphasized game changer, as just by definition, people will feel more comfortable getting back out into the world if touch alone is a lower risk.

Negative:  Businesses reopening still largely have the same costs of operating, but at almost certainly while doing so with lower volumes of people. Both due to regulations and due to comfort levels of the general population. The impact here cannot be underestimated and could prove unsustainable for many businesses. This would further strain employment, etc.

Negative: In my opinion, the easing of restrictions across the country was a straight sprint into an interpretation that the "pandemic was over!" Some of the irresponsible behavior across the country I'm observing is shocking. And I'm seeing the number of cases rising in other areas of the country where it didn't have large numbers prior. The science tells me we need to reduce the spread though the summer to help lower our chances for a reemergence in the fall/winter. The worse we do at that, the worse the re-emergence could possibly be.

Summary: There were no easy choices here and it's not without risks. But it needed to start happening. And happening it is. So far the data is looking promising from an activity standpoint. What I find inconceivable is that in this difficult time, the country is doing its best to remain as divided as ever. I've been telling everyone for the past few months that the science is what's going to lead us out of this mess. Largely uncovered in the financial industry conversations, these precautions are still extremely important in making sure the trend of "less bad" remains that way. The trend here is not comforting to me.

Employment:

Positive: Unemployment and jobless claims are declining and readings are coming in "less bad" in general. There was a huge consensus miss on employment numbers last week that contributed to the market rally above 27,000. Even though there were some corrections later on that afternoon to the number, it didn't change the fact that estimates were much worse than the reality of what came in. "Less bad" is almost always good in the market's eyes.

Negative: 40 plus million people unemployed speaks for itself.

Positive: Corporate, white collar payrolls have remained largely steady. The corporate workforce transition from office to remote has been more seamless than originally anticipated and most white collar companies are in "wait and see mode." This has been an unsung reason why the market has held up so well in my opinion. The top 10% of the population as far as income is concerned are not in recession. Not only does this mean they don't have to sell stock in a panic, but their spending has held up strongly as well. Internet/ stay at home economy is roaring in absence of traditional access as competition is limited to the big players. In addition, since people are staying home, they are spending less and savings are being accumulated. The data backs this up. This can lead to a "pent up demand" that can be unleashed on the economy upon reopening argument, which is bullish.

Negative: Corporate, white collar payrolls can be dependent on demand from the overall economy. If that demand materially subsides, either organically or due to the end of stimulus, these jobs are no longer safe. If we see an uptick in corporate layoffs, it could create a snowball effect that the market will not ignore. It's very reasonable to assume public companies are, at the very least, considering areas to trim their workforces in out of potential necessity in the future.

Summary:  Corporate payrolls have been an unexpected strength and have definitely contributed to market strength. And to this day, they are holding up fine. That is excellent news. But the possibility that this strength starts eroding is an enormous potential risk moving forward that I don't believe is fully acknowledged. 

Fundamentals:   

Summary: There are no fundamentals. Nobody knows anything. The market is trading almost exclusively on sentiment, technicals, and whatever economic data it can try to interpret. Anyone who concentrates on fundamental analysis is absolutely horrified, practically hyperventilating, at the market levels right now. Please remember Warren Buffett is a fundamental investor. It appears he has continued to sell stock even after my last post about it. 

Technicals:   

Positive: The market closing above its 200 day average is very significant. The fact it did so on the strength of the biggest lagging industries (financial, industrials) makes it an even more compelling positive. Reaching the all time highs is very realistic from a technical standpoint. But those highs would almost certainly be a fierce level of resistance.

Negative: The patterns that had been developing over the past few weeks, in my opinion, were not pretty. Bonds and precious metals (traditionally defensive) were holding and rallying off major resistance levels. Although stocks were rising too, the strength looked to be in the defensive camp. All 3 could not rally together indefinitely and something had to give. Stocks came back and busted that pattern as major biotech announcements changed sentiment overnight.   An unsuccessful re-test of the 200 day could reverse things very quickly. There's also a wide discrepancy between many individual stock prices and the cap weighted market, skewing perception of its overall health in general.

Summary: Technical analysis has been a helpful overall tool in both buy and sell points in much of the markets as the months have gone by. Especially in an environment where the fundamentals are so incalculable. However, I've found many technicians seem baffled at many of the movements. Until just recently, those patterns have completely failed against some of the negative catalysts that looked very strong a very short while ago. Short and even medium term charting leans towards strength.

Outliers:  

Positive: The psychology of opening back up is underemphasized. We are only beginning to scrape the surface on the long term effects of what this shutdown did to us in this regard. We are now starting to at least feel semi normal. The weather change alone is helping tremendously. It will not show up in the data, but in between the lines I cannot discount the importance of this.

Negative:  Propaganda and misinformation continues to be spread about the virus, the treatments, the side effects, that it was a hoax, etc. This is being spread in various forms though foreign entities such as China, Russia, and Iran in an effort to undermine the country in general. However, disinformation is very much being embraced and spread domestically in an irresponsible way by leaders and nobody's alike to try and control a narrative. If the country continues to embrace fantasy over reality and dives deeper into a mistrust of facts and science going into the fall, any re-emergence of this virus could prove to be worse than the first.

Negative:  Volatility. The market has operated in a fashion that is almost casino like. Both on the way down, and the way back up. For three months or so, it moves far, fast, reverses itself on a dime, and the narrative can change just as quickly. It's been exhausting. These moves largely mean one thing historically. It doesn't know exactly what is happening.  It's playing "FOMO" (Fear OF Missing OUT) in the interim. It may seem nice to be back near the highs (and I'm not complaining) but this is not HEALTHY market action. There's no spinning that.

Neutral:  Part of the market's optimism is that it's become apparent there will be no long term shut down going forward. There may be targeted ones, but as a country we will simply stay open no matter what. Only when we look back in history will we be able to determine how this overall train of thought worked for the country in the long term. I think it's way too complicated of a rabbit hole to dive into the possibilities. But it certainly means a lot of uncertainty.

What does it all mean (Final summary):

It almost seems incomprehensible the stock market has largely recovered at this point. "Too far, too fast" and "disconnected from reality" will be things you hear. And they're right in theory. But the history of the stock market shows that it can sense a narrative based on the events that have transpired well ahead of us. The combination of the Fed liquidity injected into the system, the "bridge to the other side" programs enacted by Congress, and the "less bad" trend while the economy opens back up can actually make sense of it all.

However there is one main point here that needs to be emphasized above all that largely gets missed about the market. The market senses reality of situations as the events occur, but before we realize they happened. 

That is not the same thing as predicting the future.  

The stock market is not the economy. And the economy is not strong on its own right now. When these programs start ending, and they will end, our new reality will start to kick in. In order for the market to continue to move up, all the jobs lost need to come back. That will require demand to go back to normal. That will require people to feel confident. Not only about their own personal financial situation, but about their health. 

This situation is so unbelievably complicated and nuanced, I still don't think my words do it any justice. 

I heard the lyrics at the beginning of this post in the car on the way back from a COVID friendly procedure grocery run, days after returning from a COVID procedure restricted cemetery burial. I probably hadn't taken a full weekend off of work in months. It was, and had been, a stressful time. It has been hard for all of us one way or another and denying that isn't human. But I knew this was going to be a long road and it resonated to further lock into focus, and to "save my tears for another day." 

Right now, at this moment, we are in a state of euphoria that we can enjoy some semblance of freedom again. We are so caught up in that feeling of normalcy, basking in the sun of things getting better, we are refusing to admit that very soon we have to start facing reality again that the normalcy probably won't last. It's hard not to see the parallels in the stock market in this regard as well.

I can assure you, the stock market is not aware of what this reality is yet. But when it does, it will know it before we do. Risk control is still very much imperative in the interim. This road is still going to be very long economically and has too many possibilities; many of which depend on events and circumstances we can't control. And that's not even talking about the potential reoccurrence of the virus.

My mentality is to treat this as an ongoing financial crisis, regardless of the little dog that is the stock market's short term movements. This is not going to be easy, as human nature and "FOMO" will continue in the interim.

For now enjoy the sun and the freedoms we have. As I have been saying all along, we will get through this. But we're not there yet. Far from it. I'll be the first one to scream from the hilltops that the coast is clear and we can begin processing all that we've been through and where we go from there. Until then, we all need to focus on getting through this intact. Save your tears for another day. 

Hope all is well and everyone is staying safe. As always reach out if you need me.

-Trevor

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