The President wants the stock market to rise. All presidents do. But more than most, that's how the present White House occupant rates his performance.
With the hope of shoring up the economy during this time of pandemic uncertainty, the Federal Reserve, for only the second time in history, has reduced interest rates to 0%. You may be paying 15% or more on your credit cards but banks can now borrow money for nothin'.
The Fed also intends to buy back up to $700 billion worth of Treasury Securities, a way to control interest rates and the money supply, in the hope that that will help spur the economy. It’s pretty much in everyone’s best interest that the market stabilizes and then proceeds to resume it’s climb.
Unfortunately, this isn’t going to happen.
At least not in the near future.
The U.S. economy is huuuuuge, at around $21 trillion per year. Historically, 60% of the economy comes from consumer spending (that’s you and me), 20% from Government spending (that’s our tax dollars at work), and 20% from business Investment. This makes up the famous equation: GDP=C+I+G. Our economy today, however, is approximately 68.4% consumer driven, with around 17.3% coming from Government spending, and another 17.3% business Investment. This means that you and I drive our economy by spending our money. What and where we spend our money is a secondary concern, but the fact that we spend it is what matters. And now we can’t.
Sure, we can buy food and groceries, medical supplies and sundries. We’ll still pay for our cable and utilities, pet food, gasoline, and some other fairly necessary items that are still for sale. But we can’t spend our money on sports, which represents a huge amount of discretionary spending, concerts, shows or cruises, and in many places bars and restaurants. People aren't flying or taking trains. Disneyland is closed. All together this adds up to a huge swath of consumer spending.
How does that relate to Trump’s stock market? Well, stock prices, which seem to simply have just gone up in the past 12 years, have nothing left to propel them. Stocks generally trade on price/earnings ratios, which means that earnings of corporate America (and other great companies of the world) drive stock prices – or when people are rational they do. With no one able to spend money on things other than essentials, and with fewer people with money to spend due to layoffs at companies catering to non-essential spending, corporate earnings cannot grow. They can’t even stay the same. And there’s the rub.
So the market may have lost 25% of its value over the past couple of weeks, and as a smarty you’re thinking, especially after your latest trip to Costco, that you sure would be smart buying stock in a maker of toilet paper! Yeah! Let’s go buy Procter & Gamble. NO! They may make some toilet paper and other consumer products that we still will use like washing detergent, dishwashing detergent, feminine products, and the like, but overall, they will see their earnings drop like a rock. There’s just not going to be enough of us spending our money on these products.
What else looks good in the beaten down market, smart guy?
How about companies that manufacture and refine gasoline? After all, when was the last time we saw crude oil prices at today’s price of around $45/barrel? Remember in 2008, when they hit high around $152? Should you run out and buy Exxon/Mobil, BP (British Petroleum), or Chevron and get in before the big jump up? NO! The Saudi’s are flooding the market with crude oil in their fight with Russia for market share, and that will only keep supplies up and prices down. Good for filling up your tank, bad for profits.
The bottom line: There is no safe haven. Even gold, an historical hedge against uncertainty, dropped precipitously on Friday, and who knows what’s gonna happen this week.
My advice: Stay on the sidelines until there’s more information to trade on.
Or play the ponies.
(Aside from being a nationally-ranked Juniors Tennis Player, Neal Abrams was a licensed investment advisor for more than 35 years. With Nadal, Djokovic, Serena and Coco on COVID-19 hiatus, he's going to look at the markets instead of the rackets).