Why is the Stock Market Going Up?

There has been a lot of debate, in some circles, as to the reason why the stock market has almost recovered from the “crash” it experienced in March. A lot of professionals don't seem to get it. But I have a theory.

The S&P 500 over the last 6 months

The “bear” argument goes like this…

  • We are now facing record levels of unemployment.
  • Some businesses have gone a couple of months without revenue while expenses continue.
  • Some businesses are closing for good.
  • Even now, with retail stores and restaurants “re-opening” around the world, they are limited in capacity.
  • What about the “second wave” as we saw in the Spanish Flu?
  • People are not flying any time soon.
  • People are not taking cruises any time soon.
  • Some people refuse to leave the house, even with stores being open again.

So why is the stock market recovering?

First, let's think about who is hurt by this crisis right now. The main people hurt by this crisis are small- and medium-sized business owners. When you go to the mall, maybe only 10%-20% of the stores you see are publicly listed companies. The majority of store and restaurant owners are family-owned businesses.

Johnny's Fine Pizza and Pasta hasn't had to report it's earnings to the market because it's owned by a family.

My theory that explains the rising stock market is that the companies that are trading on the stock market are doing OK. Amazon is doing OK. Microsoft is doing OK. Netflix is doing OK. FB and Google too. Coca-cola and Pepsi will make it through. 3M is selling a lot of masks. The drug makers suddenly are all working on a cure. The companies that dominate the stock market indexes are big ones. And they've been able to work through this.

So the bull case for the stock market is:

  • The companies that trade on a stock market can raise money and survive the crisis
  • They will all definitely still be in business at the end of the year
  • Since we are still in a lock-down state, we haven't seen how their earnings are affected
  • The earnings we have seen have only covered 2 weeks of lock-down (Q1 earnings)
  • The government will bail out any big company during this crisis

Personally, I think there's another shoe to drop.

A lot of these small- and medium-sized businesses will have to close. Either they won't open again after the lockdown, or they'll open and struggle, and have to admit defeat later in the year.

The real estate companies will be stuck with a lot of empty properties and tenants that can't pay their rent.

Travel will not return to the way it was, and airlines and hotels will need some help. Visits to Vegas will be down. Visits to Orlando will be down. McDonald's and other restaurants also will suffer from lower in-store sales. Disney will not have a good 2020 or 2021. Boeing will sell fewer planes, which could take years to recover from. Nike will sell fewer shoes. Apple and Samsung will sell fewer phones.

Governments will suffer with debt and deficits. Taxes will rise. (Well, I don't know about that last one.)

I also think governments are starting to lose their appetite for more bailouts and spending. The US already announced it will be very difficult to pass another round of stimulus. Taxpayers are starting to question who is getting checks and why. The crisis that allowed unlimited spending is passing too.

The EU can't really agree to anything right now. Some are saying it's the end of “the Europe experiment”. We'll see about that.

All very interesting stuff.

I don't know what's going to happen. I certainly can't predict with any certainty. But part of me does feel like the companies that trade on the stock market will definitely “feel the burn” in the next 2-3 quarters.

By December 31 2020, all the major stock indexes will be lower than today.

– Scott Duffy

Oh, maybe I can predict stuff. But I am not sure. Don't follow my advice.

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