Memorial Day Market Musings

Burkekoonce

As of mid-April, more than 23 million Americans were unemployed, with the coronavirus forcing shutdowns of huge swaths of the economy. That works out to an unemployment rate of 14.7 percent, the highest since the Great Depression. In Nevada, one of America’s most popular playgrounds, the rate is 28.2 percent, a figure that shows just how hard the pandemic is hitting workers in the leisure and hospitality industries.

Meanwhile, the equity markets have largely rebounded. Thanks to unprecedented stimulus and federal backstops, the S&P 500 is, at the time of this writing, down less than 9 percent for the year. The Dow Jones Industrial Average, home to more traditional industrial companies, is down a little more, close to 15 percent. Meanwhile the tech-heavy NASDAQ is actually UP close to 4 percent, and the NASDAQ 100, which tracks the largest big tech names, is up 8 percent—21 percent this quarter.

The disparity between what has happened to investors and what has happened to many workers is difficult to overstate. Nobody was expecting a perfect solution to a pandemic without modern precedent. However, as some of the dust is settling, it is increasingly clear that well-run public corporations with CPAs, bankers and attorneys managed to get to the front of the line to get their PPP loans while millions of newly unemployed waiters (and some journalists) can’t get even get through to their state unemployment departments to get their benefits.

This isn’t some leftist screed. This is the real world. And preservation of capital-morally right or not—is definitely a faster route to near-term recovery than capital destruction.

Moreover, there are real world reasons why tech giants are outperforming right now. Their businesses have been either minimally disrupted or in some cases enhanced by COVID-19. The capital needs of Silicon Valley companies are different from those companies trying to fly airplanes.

When I was a young analyst working on Wall Street many years ago, I was the associate covering a manufacturer that has just laid off everybody in its factory in Fond du Lac, Wisconsin. I think this was probably my first earnings season. Anyway, I was preparing to write a downbeat earnings note and field calls from concerned investors, and then the market opened and the stock went up several percent. The market’s view was that closing the factory was going to save the company money and that returns on capital would improve. And you know what? The market was right. This was my first experience with the amorality of Wall Street. The market is not the place to wage a moral argument.

So yes, this is terrible and it is a massive human tragedy that has occurred. But that does not mean that stocks have come unglued from reality—in fact, efficient market theorists would have to conclude that markets reflect, for these companies, a new improved reality.

But it is also true in the real world that people will vote for their pocketbooks. While folks on both sides of the political aisle will have plenty of people to point figures at when handing out the blame this November, one thing is for sure. It’s not a good look for the investor class right now. After all, it’s not greed that makes the world go around—it’s envy.

If enough people think it’s a bad thing that markets reflect reality, change can come swiftly, but not in portfolio construction—it could be at the ballot box.

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. 

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