Markets Closing for Holiday Gives Plenty of Time to Ask: What's Going On?

By:
Chris Gaetano
Published Date:
Apr 10, 2020
Major U.S. exchanges are closed for Good Friday, which allows for time to wonder why markets made their rapid climb this week amid dire news elsewhere. For instance, the news on Thursday that nearly 17 million people have lost their jobs in just three weeks, along with the news that one-third of apartment dwellers skipped April rent, was met with a shrug by traders, who drove the Dow Jones Industrial Average up by 286 points, or 1.22 percent, on Thursday. That surge occurred despite the fact that these developments indicated that American will likely be spending a lot less money than before, which means that businesses (the ones still alive at least) will get less money than before, which means less overall economic activity on which to pin investments than before. People who had been working at small businesses have been particularly affected, as a poll of 100,000 small businesses found that layoffs in March spiked over 1,000 percent.

And it's not as if the Wall Street brain trust has stopped the alarms: A poll of institutional investors conducted by Goldman Sachs found about 50 percent saying the stock market has yet to reach bottom, and 75 percent think that, despite recent gains, we're still in a bear market. Further, 45 percent don't view the market figures as particularly consequential because it appears they have yet to fully price in the major blow to the labor market. An analyst from Citibank said that the current market gains are more comparable to an aftershock, as there hasn't really been the volume to justify them. On a ground level, financial advisers share similar thoughts, as a 750-person poll found that 81 percent of them believe the market has yet to hit bottom, with most believing that will come by the end of May, and a quarter expecting it even later. Just 19 percent believe the worst is over.

So then, what gives? Are traders just ignoring all these forecasts?

Bloomberg says, for the most part, they are. It's reporting that traders, due to a lack of clarity, have mostly written off all of 2020 and are instead looking toward the long-term post-crisis future, rather than the immediate one, when we will all still be working in our pajamas. More specifically, Bloomberg is saying traders are exhibiting a sort of survivorship bias: Historically, if a company survives a major crisis, it tends to bounce back even stronger than ever. But that "if" is where the bias comes in. Traders, said Bloomberg, are basing their assumptions on the companies that successfully weathered the storm rather than the ones that collapsed. While, yes, AIG eventually emerged  rom the 2008-09 financial crisis in even better shape than before, Lehman Brothers and a host of others were not so lucky. Traders are apparently thinking whatever companies they're buying will be more like AIG than Lehman Brothers.

It calls to mind the classic story of when, during World War II, the Allies were examining where planes had been shot and adding armor in those spots until a mathematician pointed out that they should be doing the opposite, since those bullet holes actually indicated where a plane could get shot and survive. Engineers were basing their risk assumption on the planes that came back rather than the ones that didn't.

However, the bulls note that even in the 2008 crisis, only a minority of companies went under, with the remainder coming back stronger. While it seems they recognize that this is a gamble, they feel it's got good odds. Still, Bloomberg notes, this assumption rests on a relatively speedy rebound, which is far from certain. And even in the case of a rebound, it should be noted that it took AIG many years to return to its previous strength. Also, another Bloomberg article suggests that more companies may go under than were predicted to: Federal Reserve economists are estimating that business bankruptcies could grow by 200,000 to 1 million absent further action, and personal bankruptcy is also expected to increase.

The New York Times, meanwhile, notes that traders are likely factoring in the massive aid programs coming out of Congress and the Fed. To these traders, unemployment figures might actually be a good thing because they increase political pressure on Washington to give out even more aid. This, in turn, will ensure that most companies will emerge from this crisis with little long-term damage.

Of course, the companies that traders are speaking about are those that can be traded on public exchanges. These are the ones that will benefit most from Fed actions that are meant to ease access to capital and credit. Small businesses, which are the most imperiled in this crisis, will need to content themselves with relief, such as Paycheck Protection Program (PPP) loans, which have not been going well so far. But this seems to mean little to those fixated on just what they can buy on the Dow and Nasdaq.

Further, the Wall Street Journal said that while traders seem to be pricing in the costs of the lockdown period, they seem overconfident that the situation will soon return to normal. While companies might rehire droves of workers once the lockdown period ends, there's also a chance these job losses might be longer lasting than traders think, which will depress consumer confidence and spending. The Journal also pointed to the possibility that COVID-19 may have a second wave, which would extend the period of economic chaos past what Wall Street seems to be expecting.

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