Posted on by Matthew Freedman

What to Make of the Recent Positive Movement in the Stock Market

I’m writing this piece early in the morning on Tuesday, Mar. 31, before the stock market opens.

Over the past five business days, the S&P 500 has rebounded magnificently. On Monday, Mar. 23, it closed at 2,237.40. Yesterday, it closed at 2,626.04.

I am conflicted about the market’s recent upward trajectory, and in this piece I explore why.

People Die, and the Market Goes Up

The way I feel is almost articulated by what Ben Rickert (Brad Pitt) says at the end of this scene from The Big Short.

While Charlie Geller (John Magaro) and Jamie Shipley (Finn Wittrock) celebrate the recent deals they’ve struck — deals that could make them incredibly rich — Rickert castigates them and points out that, if they are to be successful, the rest of the country will suffer.

Don’t do that. Stop. Stop. Stop that. Stop it. Stop. Do you have any idea what you just did? … You just bet against the American economy … which means, if we’re right — if we’re right — people lose homes, people lose jobs, people lose retirement savings, people lose pensions.

You know what I hate about fucking banking? It reduces people to numbers. Here’s a number: Every 1% unemployment goes up, 40,000 people die. Did you know that? Did you know that? … Just don’t fucking dance.

I want the market to rebound — but I care more about the economy and public health — and right now as the market is going up more and more people are losing their jobs, and the coronavirus crisis continues to take lives.

I understand that the market is necessary, but it strikes me as incredibly unfair and unfeeling that millionaires and billionaires and investment firms have made money over the past week while everyday people have worried about their job security and the health of their loved ones.

I understand fully that this is an emotional response and probably not productive.

Should the Market Even Be Going Up?

As someone who has been almost entirely in cash for months and who had a small short position last week — it has since been closed — I can’t claim to be perfectly objective.

But my position and perspective are based on research. Maybe my research has been shoddy or the conclusions I’ve reached are faulty. Both are possible. I’m by no means a professional investor or even that skilled of one. I’m just a guy who tries to stay on top of the relevant information and make reasonable decisions.

And my research leads me to believe that the market has been reckless over the past week — because the long-term outlook for the economy (I believe) is still bleak.

It’s pretty easy to be bearish right now: U.S. coronavirus testing is still inadequate. It’s improving, which is great news, but it’s not where it needs to be.

Also, too many people are acting as if the coronavirus is a short-term problem. Even after the coronavirus is under control, its aftermath will linger.

And the post-coronavirus economic data coming out of China is discouraging. A V-shaped recovery might be unrealistic.

On top of that, companies receiving loans via the $2 trillion stimulus package won’t be able to boost their share prices with buybacks.

Even if all of our coronavirus-connected public health problems magically went away right now, I expect that our economy would still need months — maybe years — to recover.

Companies will be slow to hire new employees. Consumers will be more cautious in spending money. And our national debt will be at least $2 trillion larger — and that number might be closer to $6 trillion by the time this is all over.

And that’s an unrealistic best-case scenario — because we still need to get the coronavirus under control.

And maybe I have a skewed perspective on the virus because of where I live: Cedar Rapids, IA. As of writing, Iowa has 424 confirmed cases. That’s not many, but Linn County (which houses Cedar Rapids) has a state-high 71 cases.

Just a couple of weeks ago, we had zero cases.

And now we lead the fucking state.

On top of that, the adjacent Johnson County (where the University of Iowa is located) is second with 70 cases.

In total, 38.2% of the confirmed cases in Iowa are in my county or a county immediately next to mine.

So this has me a little freaked out — especially because Iowa is doing relatively little (I believe) to stop the virus from spreading.

Like most states, Iowa has closed bars and restaurants except for takeout and delivery, and gatherings of more than 10 people are prohibited. But no quarantine procedures have been put in place. Almost all businesses are still open. And Iowa is one of just three states in the country — along with Idaho and Maine — yet to mandate school closings (per Politico).

My wife and I have been sequestered in our home for maybe three weeks now. We’ve left the house only to go on isolated walks around our neighborhood and to go to the grocery store for food.

When we’re on our walks, other people who cross our paths don’t seem all that worried about keeping their distance.

And a couple of days ago in the grocery store, the guy waiting behind me in the checkout line stood way closer to me than he needed to. He was literally close enough for me to punch — and I wanted to — but that would’ve required me to touch him.

Classic catch-22.

The point is that people here are still not taking the proper precautions, and if that’s happening here — in the county with the state’s most confirmed cases — it could be happening elsewhere … or fucking everywhere.

If we can’t combat the coronavirus effectively, I don’t think the stock market has any business going up — and I have serious concerns about our ability to control the virus.

“Better Is Not All Better”

My wife and I are rewatching Curb Your Enthusiasm, and the scene with the acupuncturist from Season 2 comes to mind.

https://www.youtube.com/watch?v=jlFr-kG0T7Q

Why has the stock market gone up over the past week?

Perhaps because the entire coronavirus situation is “better.” It’s not great. It’s definitely not where we want it to be. But maybe it’s better than expected.

Or at least maybe people believe it’s better than they expected it to be.

With the market, expectations and perceptions are everything.

It’s sort of like the point spread in sports. What matters isn’t whether one team is better than the other. What matters is whether a team can exceed expectations and win bettors money by covering the spread.

And it’s notable that some sharp people — some of whom were early to identify the coronavirus as a potential problem for the U.S. — are now optimistic that we will be able to minimize the impact of the virus.

If Empire Maker is putting his money on the under, I’d be a fool not to consider his position.

What is the driving force behind the relative optimism of the past week?

It’s likely that some investors have had an internal conversation with themselves that goes something like this.

I thought this situation was going to be 100% horrible. And, yep, it’s horrible. But it’s maybe only 80% horrible — because of the $2 trillion stimulus bill, and the Federal Reserve’s aggressive monetary policy, and all the social-distancing measures put in place, and especially the ingenuity and entrepreneurial drive of pharmaceutical and biotech companies, which will find an effective treatment for the virus in the short term and a vaccine in the long term. And since this situation is only 80% horrible, the market is undervalued.

And I must say — if the pharmaceutical and biotech part of that thesis is accurate — it’s compelling.

The stimulus package, the Fed, the social distancing: Whatever.

That stuff’s not unimportant, but I’m a little dubious as to how impactful all of that will be, and it’s fairly known.

What isn’t known is how effectively pharmaceutical and biotech companies — and all companies, for that matter — will respond to the coronavirus.

And if there’s something I’m not going to devalue or underestimate, it’s the ability of American companies to find solutions.

“The Spirit of Enterprise”

I’m currently reading The Federalist Papers — it’s one of the six nonfiction books I want to read during the coronavirus crisis — and I’m struck by how often Alexander Hamilton highlights, even in passing, the strength the country draws from its entrepreneurs and its workers.

The prosperity of commerce is now perceived and acknowledged by all enlightened statesmen to be the most useful as well as the most productive source of national wealth, and has accordingly become a primary object of their political cares. (53)

The businesses of the United States, and the workers — “the assiduous merchant, the laborious husbandman, the active mechanic, and the industrious manufacturer” (54) — they are the greatest assets this country has.

I don’t especially trust the government or the Fed to save the economy. I don’t trust random people to stay at home and stop the virus from spreading.

But, for some reason, I trust U.S. companies. I trust what Hamilton calls “the spirit of enterprise” (27).

American entrepreneurs will do everything they can to save the economy AND to get the virus under control.

If there’s a bullish case to be made for the market, that’s it.

Over the past 250 years, American ingenuity and industriousness is undefeated.

America, fuck yeah.

Ben Hunt thinks the coronavirus crisis could be our finest hour. He might be right.

I was correct to go in cash when I did, and it’s hard not be skeptical about the future, but perhaps I have been too quick to discount the possibility that American businesspeople will save us.

I’m not a financial advisor, and I don’t suggest that you make any decisions based on anything I say or write … but, at a minimum, I’m probably more optimistic about our future than I was yesterday.