Market Watch - September 4, 2020
Investors are stunned the market is back to pre-Covid-19 levels. Unfortunately, many restaurants and small businesses will shut down, and 37% of hotels are in trouble. That type of stress would usually send the market south; however, it’s important to remember the market is comprised of millions of bits of information and facts. The facts, coupled with few other investment opportunities, are what is keeping the market at historic levels. Unlike TV and newspaper opinions, facts, involving all the science of Covid-19, have pointed out four things the market is absorbing:
1. Covid-19 is not as serious as previously thought. It is specifically dangerous to people with pre-existing, mortally dangerous conditions, which conditions relate mostly to our elderly;
2. The market sees continued tremendous opportunity for U.S. business as we are in better shape than any other country, with more cash than any time in history;
3. The U.S. is getting away from depending upon China for drugs and other critical products;
4. There’s an “imminent” cure for Covid-19 out there.
Facts about Covid-19
1. 60% of deaths relate to 75 years and older, and at least 90% had pre-existing conditions (CDC website).
2. The median age of deaths is 81, and more people over 100 have died than people under 40.
3. Deaths divided by total positive cases has collapsed.
4. A just released Oxford University study concluded: “people over 80 are twenty-times more likely to die than someone in their 50s”.
5. Economic reasons driving the inflation of “Covid-19” deaths:
a. If a Medicare patient is admitted to the hospital for an array of illnesses, the government pays the hospital $5000;
b. If it’s reported the patient is presumed to have Covid-19, the payment is double, and if the patient dies, payments can total $40,000;
c. $175 billion of PPP money has been earmarked for hospitals. Many hospital deaths are labeled coronavirus, even though other pre-existing conditions probably have been the cause of death. The government has made it easy for the hospitals to “fudge” records for financial gain.
All of these facts are expressed in the stock market which is always looking ahead, and has concluded that the present structure of our economy has positioned U.S. companies for significant growth. By mid-March we knew this disease targeted infirm, and mostly elderly citizens. The market went up. Three months later, in June, this was confirmed with statistics as shown above. The market hasn’t stopped going up since. Every story that does not mention the vast over representation of nursing home deaths is deliberately concealing the truth, and the market doesn’t buy it. As far as the market is concerned, Covid-19 has been a bad dream, but it’s over.
The above facts published by the CDC and other gatherers of medical statistics, like Johns Hopkins, make it clear this disease is specific to older, already deathly ill people likely to soon pass on. It’s also dangerous for people who have multiple health problems like obesity, diabetes, and breathing and lung issues, but so is the flu. All of this is easily containable within the existing health system.
As they were earlier this year, European economies are suffering. They will continue to lag ours. The value of our stock markets indicates, and exports support this, that U.S. products are in great demand. Readers might recall that since 2016, exports have climbed to record levels, as have our GDP, and the stock markets. The economy has prospered because there has been adequate cash available. Now, several months after the crisis started, the assumed huge loss of cash did not occur. PPP money flooded both individuals and banks with cash. Businesses fail because they run out of money. The market sees an economy bloated with funds, and while many businesses will fail, it is assumed we will continue to prosper. Most investors have made very few moves during this six-months, and while they may have suffered severe angst in February and March, the market has come back nicely. We can expect it to remain at these levels, given current conditions.
Question: While the above is logical, might the elections dramatically affect the market?
Answer: There are only a few thousand men and women who are responsible for investing and managing, trillions of dollars. They know our economy is comprised of big business, which represents 56% of U.S. economic activity, and small business which represents 44% of U.S. economic activity. Money managers are focused on big business, and their balance sheets are in great shape. Big business is expected to prosper for all of the reasons discussed above, regardless of which party perseveres in November.
Question: What shifts in investments, and funds, can be expected in the event of one party or the other winning the election?
Answer: There will be policy changes, but the market is indicating the U.S. has businesses that have positioned themselves to succeed under any administration. Wall Street sees this. Money has no conscience. Money managers care about one thing, and that’s performance, which they apparently don’t see inhibited, long-term, by either party.
Question: Are there existing potential problems the market has not properly reflected?
Answer: The addition of about 6 trillion dollars to the money supply has added more than 25% to the debt burden of the Federal Reserve System. The market isn’t concerned. At some time in our history, as it has the past several times we have been bankrupted, the market will recognize the problem with government debt, and there will be realization. It will be painful. Now, however, the market sees no difficulty in the economy, including our huge government debt.
Conclusion
There is little alternative to owning stocks if investors want any yield at all. Savings accounts pay almost nothing. An investment in the ten-year treasury bill yields only about .65 of 1%. As long as stocks yield more than the bond market, money managers are going to invest billions of dollars of monthly pension funds into the only currently viable investment: stocks. That alone provides demand for the market to remain at these levels, at least until there is a change in the cost of interest.
The country’s cash position is important. One would think the market should be several thousand points lower as GDP dropped 33% in the second quarter. Even though Congress provided $660 Billion for small businesses, it’s estimated 66,000 to 110,000 will close forever. To put this in perspective, more than 500,000 businesses are founded every month in the United States. While small business represents 44% of all U.S. economic activity, the market is saying the number expected to fail can be absorbed by our economy without serious downward pressure on stocks, and further: (1) things are getting a lot better; (2) the good economy we had going into Covid-19 will return; (3) the U.S. economy is positioned to compete favorably.
One word of caution to ponder: while the DJIA and S&P 500 are currently at historical levels, is it wise to invest any more of one’s capital in the market right now?
Caveat Emptor.
George Rauch
September 4, 2020
