Several lines below you can read an excerpt from my Weekly Market Letter available exclusively for subscribers. In this week issue:
- Stock market developments and the S&P 500 big companies concentration
- FANG stocks
- US households and small businesses
- Federal Reserve and other central banks interventions
- Global Economy

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“The process of investing is not about “guessing” but rather “knowing” what you are buying.” 
Lance Roberts

Over the past several weeks we’ve come from extreme pessimism in the case of the stock market and the economy to the point where all bad news had been priced in and the guardians (central banks) of the economy will bail everyone out and save the day. To put it differently, don’t fight the Fed. There is a prevailing perception that no matter how dramatic will be the economic reality the most powerful central bank in the world supported by its counterparts around the globe has enough tools to prevent a bigger and prolonged slump. Analysts and investors have already started arguing what kind of recovery we may expect in the upcoming months. In the process of investing, however, most of you make decisions by yourself. Therefore, I would like to ask you a very important question which can be answered over time. How much chance do you see for the economy to come back to the status quo from January 2020 in one, two or six months?
I’d like to expand this topic a little bit further. Last week I had an interesting discussion about the labor market in the United States after Thursday’s initial jobless claims data came in. In the week ending April 12, we’ve seen 5,245,000 people losing their job. In four weeks it was 22,025,000. To give you a perspective, since the Great Financial Crisis 22,088,000 jobs were created. Therefore, in less than a month more than 10 years of job creation has been wiped out.
This is a very dramatic number. It has never happened before. The pace of layoffs is truly unprecedented. However, some claim that the US labor market is very elastic and many of these jobs have been frozen instead of destroyed and when the economy reopens then everything will come back to normal. People will get through the crisis thanks to the government stimulus and eventually, all will be happy when the process of rehiring initiates. In other words, they claim that the data is over-interpreted. I intensively thought about that and it brought me the following conclusions. In my opinion, the unemployment is rather underestimated than overestimated. First, because computer systems are largely overwhelmed and many people cannot register for the unemployment insurance. Some systems come from the 1980s’. States like Florida, Michigan, Virginia, Texas or Oregon are facing these problems. It is worth remembering that Texas is the 10th largest economy in the world by GDP (more than South Korea or Canada). 

Furthermore, Gig workers, independent contractors and self-employed are not eligible to apply for this kind of benefit. Given that it may turn out that the damage is actually more significant than we think. To observe whether that is true, in the next weeks it would be useful to watch continuing jobless claims data which shows how many people are still receiving unemployment insurance benefits. If continuing claims will not substantially decline after the economy reopens, let’s say 70-80% during the summer that would mean all government and central banks’ programs were not fully effective. In other words, many jobs are gone. 

One example is the Paycheck Protection Program (PPP) under $2,2 trillion US government aid. It allows small businesses to get a loan that doesn’t have to be repaid (will be forgiven) if more than 75% of borrowed money will be spent on payrolls and all employees will maintain their jobs or will be rehired until June 30, among others. On Friday, after two weeks $350 billion of money allocated for this program has been finished. Now, to extend this, Democrats and Republicans would have to agree and pass a new package. Let’s do some maths. 
According to SBA (Small Business Administration) in the US, there have been 30.7 million small businesses in 2019 employing almost 60 million people or 47% of the entire workforce. These firms output accounts for 44% of the US GDP. The SBA also reported that they approved 1,661,397 loans under the PPP program before they ran out of money. Recall the data from the last week that the average small business has a 27-day cash buffer and 25% of them only 13-day cash buffer. Moreover, data from Hedgeye shows that 22% of small companies will not survive if the shutdown will last for a month or less and 56% will not survive if it will last 1-3 months. 

Considering the data it turns out that many of them have already gone bankrupt and until we’ll see another form of aid thousands of them are yet to follow the same path. If that materializes we might witness a much more protracted downturn and people will not be able to get back their jobs so quickly. The current mainstream perception is that the Fed will print out each of these issues. In my opinion, it would be wise to take this scenario seriously both in terms of future investment and spending decisions. The disconnect between the real economy and the stock market is massive and many analysts do not appreciate that fact. It is simple enough to just look at the streets which either are empty or the traffic is highly limited, people are wearing masks and a few workers you can see are construction, essential stores, uniformed services, and health workers. 
It is also seen in real data such as world gasoline demand which halved in just 3 weeks and sits at the lowest levels since the 1960s. Oil and copper prices are also showing this huge discrepancy. The question which arises is whether the economy will pick up first and catch up to the stock market or the opposite happens? In other words, can the Fed print the United States out of a prolonged recession?

Jerome Powell, the Fed Chairman promised that they will never run out of bullets. And as of today, the market is believing in these words. The market reacts as the Fed is the cure for the coronavirus and its consequences.
source: The Market Ear, Thomson Reuters

The top part of the chart shows the total value of assets on the Federal Reserve balance sheet, the bottom part of the S&P 500 index. A big bounce in both - not only because of the Fed's actions but also due to the fact that the market was highly oversold. I think that an ideal scenario for being bullish for stocks is that the Fed and other central banks will be able to provide liquidity throughout the entire crisis period until the economy will start substantially picking up. The problem is that at some point the Fed will have to step back (at least gradually) and this might be a big shock for the market. Unless the shock occurs before. In other words, either “don’t fight the Fed” wins or the economy deteriorates even further and the market capitulates. 

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