We know the stock market doesn't reflect current conditions in the economy. You would not have 16.4 million unemployed, or 10% of the country, unemployed, admittedly down from 24 million in April. The gains since April do not match the dramatic increase in stock prices. The shortest bear market in history does jive with the current reality. That's why I have been saying that we have a "V"- shaped stock market recovery, not a V-shaped economic recovery. Given the high level of unemployment, a V-shaped recovery matching the stock market's comeback does not hold up under close scrutiny.
But the stock market is a forecasting machine, not just a snapshot of current conditions. In that sense it's not rigorous to throw out the stock market as just being plain out of sync with the economy. You have to make some suppositions, take some optimistic leaps, if you will, to validate and extrapolate what the market may really be saying. So, I am going to pick some of the more visible, recent pieces of data to see if they can justify a much better economy in the next six months. I want to do it in point counterpoint, so you don't think that I am either a Pollyanna or a Negative Nancy about the market's forecasting ability. I want to use visible signposts so we can all understand, rather than abstruse economic data that I regard as a waste of your time.
First, let's take the most relevant data available, the data that we got from Walmart (WMT) , Home Depot (HD) , Lowe's (LOW) and Target (TGT) , the biggest retailers, save Amazon (AMZN) and Costco (COST) . Given that all of these companies just reported in the last 48 hours they provide a fresh read on what's about to occur.
If you listened to the conference calls, you have a couple of takeaways. One is that the consumer is on fire buying up pretty much anything at these stores that's not nailed down. The most popular items? Anything having to do with your home, particularly making your home more livable and more workable, because so many people had to leave their offices to work in their houses. Second takeaway, for the most part spending tailed off as we got further along in the quarter and the stimulus waned.
In fact, only Target, which had the best of all the numbers, gave me conviction that the boom has continued beyond the stimulus. Third takeaway, there's not much else to do. Shopping at these essential stores became essential for your sanity, at least once they convinced you that you won't get sick by going there.
Still, though, there can be no rush to judgment on these fantastic numbers. As Brian Cornell, the hard-charging CEO of Target made clear, much of the robust gains came from losses of others, to the tune of $5 billion. Yes, Target took $5 billion in sales from the rest of retail. Given that Costco, Amazon, Walmart, Home Depot and Lowes, all had great numbers, one can only conclude that these gains are zero sum and predict that the rest of the retail world is going down the drain with Drano. So it's entirely possible to craft a negative scenario from these numbers. Further, if there is no stimulus coming, all of these store chains could be running on empty as soon as the house is made into an office. Judgment? Mixed.
Second predictor? Commodities. Right now we have a roaring bull market in all things commodities, oil, natural gas, lumber, copper you name it. You can reach that conclusion by looking at the oil stocks but, more important, Freeport-McMoRan (FCX) and Teck Resources (TECK) , coupled with the Home Depot conference call. I think oil could go either way. We are only up here because OPEC is holding back oil. But the others? They are saying unequivocally that better, albeit, inflationary times are ahead. Score one for the V economy for certain.
Third, entire housing complex is on fire and has been for many weeks. That jives with what mortgage purchase numbers show. Housing represents about 10% of the economy, but as I always say it, punches above its weight. Home building and home buying and home refurbishing are all tremendous for the economy. I think that the resurgence in housing can only be considered a great harbinger of confidence in the future.
And, I don't just think it is low rates that are driving the housing bonanza. I believe that people have become more optimistic about beating Covid-19 in the near future. Now the counterpoint argument is that they are running away from Covid, that's what de-urbanization is about. Still, you do not put down big bucks, for a new or old home, just because mortgage rates are low. Optimism is a very good barometer of future economic activity. Another potential win for the economic bulls.
Now, to save housing and to save a lot of other companies that could not get financing -- think cruise lines, travel and leisure -- the Fed had to print a lot of money and the government had to dole out a lot of money. Again, we all can agree on that. But what we can't agree on is whether the entire rally is based on government actions. I believe a lot of the rally has nothing to do with the Fed or the Treasury. Apple (AAPL) did not hit $2 trillion in valuation because of the Fed. Microsoft (MSFT) , Amazon, Alphabet (GOOGL) didn't either. These companies earned their valuations by sheer grit. They aren't even that expensive. How about the other so-called overinflated stocks, like Tesla (TSLA) ? Again, I think Tesla is a technology company that sells cars and it is worth the $350 billion, because if it can make and sell the 20 million vehicles the bulls say are possible, the stock may actually be cheap.
So how do these valuations cut? I think that the overall rally in the stock market is heavily weighted in favor of tech, and while tech does hire, its biggest use is to fire, as humans are expensive and machines aren't.
I think the so-called pump up is just a push for the future, beyond housing. Damning? Not really, as, again, housing is big. But the actual influence of higher stock prices on the economy beyond whether it can forecast or not? Frankly not that great. That's because we are all so brainwashed to own the S&P 500 that getting back to even doesn't mean that much for spending power. It does contribute to the optimism, though.
If you want to know what should worry you about stocks, it's the continued bear market in the financials. They can't get out of their own way. I would feel a heck of a lot better about the economy if fintech, or faux financials, were going down and the big banks were going up. In many ways, that's far more important than Apple hitting $2 trillion or the home builders rallying or even the commodities going higher.
Could the market be predicting a boom? I think, yes, but let's go back to that one caveat, about the home buying, consumer spending, and the stimulus. I think that everything keeps coming back to the same issue: Covid-19. If you believe, for example, that Regeneron's (RGEN) new cocktail trial with Roche (RHHBY) can cut the death rate to much lower levels, if you believe that a vaccine is only six months away, if you believe that we will have stimulus to bridge the disenfranchised people who are going to fall through the cracks because of a collapse of the unseen small business breakdown, then the market may very well be forecasting accurately.
Me? I believe the economy has changed beyond what anyone thought it could, because of how dangerous Covid-19 is. If we didn't have small business, if everyone shopped at Walmart, Amazon, Costco, Target, Home Depot and Lowe's and that didn't hurt smaller fry, and if we had never built up travel and leisure and entertainment and dining out to be integral to our economy's future, then I would say the stock market's going to be dead right. But small business is the economic future, not the stock market, and Covid -19 can wipe out the future a lot easier than Apple can cross $2 trillion and we can get a chicken in every pot and two cars in every garage.
(AMZN, AAPL, COST, MSFT and GOOGL are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
