Just before the climactic scene in Star Wars when Luke Skywalker blows up the Death Star is one of most compelling sequences from the film. The red team of three X-wing fighters races through the Death Star’s weird equator canyon toward the target—the exhaust chute. Darth Vader personally vaporizes two of the fighters, but the intrepid leader speeds on.
“Almost there, almost there,” he repeats, even as his comrades meet their doom. Finally, against all odds, he fires his torpedoes at the target, only to have them fall harmlessly on the surface. Moments later, Darth Vader wastes him too.
It’s a great set-up for the big payoff. But then again, that’s Hollywood.
Ladies and gentlemen, we are getting closer to the “almost there” moment in the markets.
Yes, there’s a powerful case to be made that Luke Skywalker grew up to become chairman of the Federal Reserve and that the market will continue to power ahead. Certainly, as volatility continues to recede, as measured by the VIX Index, that has been the case ever since the March lows. The bull case is that all else equal, the market should rise as volatility continues to fall back to its normal levels.
The VIX, still north of 22, remains elevated by historical standards, but not by as much as it has been. With the Fed, the Congress, and now the president getting in on the action, there’s a sense that the federal government represents a safety net that will keep us from the fate of Red Leader, and Porkins, and all the other pilots who bit it before the Hollywood ending.
But it better. The threat of Darth Vader taking out the whole battle group is still very real indeed.
While the markets have marched higher almost without interruption, the economic recovery seems to have lost momentum.
Nonfarm payrolls rose in July about as expected, with a 1.763 million gain, and the unemployment rate fell to 10.2 percent. However, the unemployment/population ratio rose to 55.1 percent, up from 54.6 percent in June and from the April low of 51.3 percent. The pace of states reopening has slowed as the spread of the novel coronavirus has continued. Now that federal relief programs are running out, the most vulnerable Americans will soon be entering a new phase of difficulty, one that will require government support in the near term.
This economic fragility is starting to show up in the data. The Dallas Fed’s Mobility & Engagement Index (formerly the Social Distancing Index) measures the deviation from normal mobility measures induced by COVID-19, based on geolocation data collected from a large sample of mobile devices. The index is scaled so that the average of January and February is zero and the lowest weekly value, recorded April 11, is -100. According to this index, activity has stalled. After reaching its nadir in mid-April, the index had climbed back into the low -40s in late June. However, since then, it has not moved much, other than ticking back down to -45 last week.
Darth Vader is not standing still, with more than 5 million cases and more than 163,000 deaths.
Then again, neither is the rebel alliance.
While COVID-19 is far from behind us, it is at least fair to say the spread is stabilizing in most of the country. As measured by the difference in the percentage of positive tests between now and two weeks ago, the spread of the virus is declining in most states. According to Johns Hopkins, as of today, just 21 of the 52 states plus DC and Puerto Rico, reported an increase in positivity percentage. That’s still a lot, but it’s 21, not 41.
What’s more, new cases seem to be trending lower. After peaking on July 24 at 74,360, reported new cases yesterday were 40,171. Yes, challenges lie ahead, but social distancing measures seem to be working.
It will be critical for federal relief measures to fill the void while the economy recovers in the pandemic’s aftermath. However, if lawmakers can push through one final package, it just might be enough to stave off the worst of the economic damage to American citizens and to American companies and their earnings power.
We’re “almost there.” But Han Solo is not coming to the rescue this time. We will be counting on each other.
Any opinions are those of Burke Koonce and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Burke Koonce is a financial advisor at Raymond James & Associates, Inc., member New York Stock Exchange, member SIPC. www.raymondjames.com/burkekoonce