On July 29, Federal Reserve Chairman Jerome Powell said, “The path of the economy is going to depend to a very high extent on the course of the virus, on the measures that we take to keep it in check. That is just a very fundamental fact about our economy right now.”
So far we are seeing some hopeful optimism about a potential vaccine for COVID-19, but a quickening in the spread of the virus. There is concern that there could be another lockdown of the economy. With schools due to open in weeks, no one is sure what will happen. How does virtual learning affect back-to-school sales? If colleges and universities go virtual, how will all of the business that serve them survive without students on campus?
Last week, I read a report that up to 40% of restaurants in New Orleans may never reopen. Some health experts say that for schools to allow student to attend in person, community bars and restaurants may have to stay closed to reduce the spread of the virus. How about all of the artists and craftsmen who earn living selling products at canceled festivals? Can professional sports continue without fans in attendance? Amusements parks are running at 20% capacity and a season that might only be six or seven weeks long. Last week, our community picnic was not held for the first time in over 100 years! The U.S. and world economy must look different after these occurrences.
We have witnessed more changes in 2020 than we have in decades. The unemployment rate was the lowest it had been in 50 years. The stock market was at record highs. All of the sudden we hit the wall of the virus.
There has been a huge disconnect between the economy and the stock market. There are reports by Household Pulse that up to 40% of renters in Pennsylvania could face a rental shortfall and potential eviction. How does this affect banks, investors, tax rolls and many other things besides the families losing their home?
The stock market has recovered all of the losses when looked at overall.
Easy money from the FED and massive stimulus packages have been part of the reason. A few companies are driving much of the gains. One way to measure if the stock market is overpriced is to look at price earnings ratios. On July 30, the forward P/E ratio was 22.2x. It has not been this high since the tech bubble crash in 2000. It is well above it 25-year average of 16.4x. Recently Goldman Sachs reported that single stock option trading volumes are bigger than share volumes for the first time ever.
Options are a way to buy into the market that uses leverage and is not usually done by average investors. There are many algorithms driving the market. This is not your grandfather’s stock market. You are often betting against computer models. Be sure you understand the risk you are taking, and make sure it matches your risk profile.
Jim Cramer pointed out last week that BP reported quarterly results. The market’s reaction, he called “perplexing. “BP had raised the dividend early this year before the pandemic. They just announced they were cutting it in half and said they lost 6.7 billion in the second quarter. The market’s reaction to this bad news, it surged up 7%. Something is not connected.
There is good news in all of this. Americans are strong and we will survive. Those who want more for their families will assess their situation and make the necessary changes to help their loved ones. Next week we will discuss what these positive steps make look like.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.