Profit-taking? Or the real economy? Every day that the averages are down now, we have to ask ourselves is this market finally responding to the fact that we have Great Depression like unemployment - 38 million jobless according to this morning's numbers - or are sellers naturally emerging after a gigantic recovery in stock prices.
Why do we have to go through this exercise? Because it's widely being recognized that the rally is totally out-of-synch with what's happening in the country and it can't possibly stay that way. Or can it?
This morning David Faber, Carl Quintanilla and I kicked this very point around. David was incredulous that I thought the divorce from reality is wide enough that we could just be seeing a garden variety selloff and the market regards the reality of jobless with a yawn.
That got me thinking, in the depths of today's selloff, how much of the decline can be related to the trials of the real world and how much can just be related to stocks being ahead of themselves.
So let's go over where we are and whether today's selloff portends something bigger, something that could begin the process of synching up with sobering reality of torrent of layoffs and the permanent closing of a huge number of businesses.
Why don't we start by getting some reasons on the board that could explain why the decline is temporary, or, why we have been rallying, despite the news that another 2.4 million people filed for unemployment this week.
First, there's the news that Treasury Secretary Mnuchin told an on-line group that there is a likelihood that Congress has to add stimulus to the $2.2 trillion already injected into the economy. When you heard that you know that the administration is not tone deaf to what's going on on Main Street, the street that is no longer that close to Wall Street, if it is close at all. They use to intersect but now they are on parallel tracks, but with the trains going in two different directions, one north and one south, the latter providing miles of pain. We know that Speaker Nancy Pelosi has lined up a bill for trillions in more stimulus but it contains a host of doles that will never pass Republican muster. The fact that it may be necessary is a new stance, though, and once it's on the table something will get done. The impact? If you know that several trillion dollars of stimulus are coming then you know that the future has a chance to be brighter than the past, something that's needed to justify rising prices.
Second, the Federal Reserve has been injecting money into this system at a pace that's furiously positive. In the last two months we have seen more money supply generation than we saw in the five years after the Great Recession began. When you hear that the stock rally is simply the creation of a gigantic Federal Reserve bubble, this money supply explosion is a big part of the problem, or the solution if you want stock prices higher and don't forget the job of getting this economy back on track is helped by rising prices and the concomitant wealth effect. As long as the Fed's going full throttle and rates stay low, stocks remain a terrific place to be, even if the economy is incredibly weak. If companies can maintain or even increase their dividends at this time, they represent a much better buy that cash. Did you know that four trillion dollars have been pulled out of this market and, like a pent up public in shelter at home, regulations seems to want to come back into stocks. Like the populace it purports to represent that money is itching to get to work, because it sure isn't making anything on the sidelines.
Third, the vaccine. All week we've been dealing with reports that we could be near some sort of vaccine against Covid-19, the reason we always have to debate this stuff in the first place, and if you wait a second, you will know why I put it like that. At the beginning of the week we heard that Moderna (MRNA) might be on the verge of the first weapon against the scourge. It sure seemed exciting until the next day when Moderna announced a stock sale and a biotech journal questions the efficacy of the shot. Moderna came close to making such claims but I am chalking it up to a disease that often afflicts young companies: premature explanation. Had they simply said that the vaccine didn't have any adverse affects and left it at that perhaps the stock couldn't have popped and the stock would be sold at a lower price,. But perhaps the company felt compelled to give unsubstantiated commentary that should have been held for later. No matter, the fact is that this week was devoted to vaccine possibilities and that cuts in favor of the stock market simply as predictor of the future as always and the future will be brighter than the past if a successful vaccine can be introduced.
Fourth, a substantial number of people, many governors and, to a lesser extent, a handful of fund managers, believe that the disease has been tamed or, oddly, never was a big deal to begin with. This view seems to have become a geographic concept. People in the areas of the country not hard hit are beginning to blame the mistakes of the policy-makers and even the denizens of the New York areas. I think it's an ill-advised view, but if you feel so inclined then we are at the tail-end of the pandemic and that pandemonium is going to break out if we aren't. This is a view that says we are about to return to the skies, hit the beach, take the cruise - if they let us - let alone get the hair cut, get the nails done, work out at the gym, have a non-socially distant drink and a funeral pyre for the mask.
Then why is the market down today? Is it that unemployment number? The averages, I think, aren't telling the truth. The stocks that are rallying involved retail, housing, and travel and industry. If anything these are in sync with the bull case. Down and out mall retail's the strongest part of the show, and the weakest is the stay-at-home plays, like Take-Two Interactive (TTWO) , the video game company we will have later on Mad Money, and the "essential retailers" like Target (TGT) which will also be on tonight.
So then why are down? It's simple. The stocks that got most hammered are the international techs, the companies not constrained to the U.S. which have led us on this comeback. They are plummeting for a simple reason: the president's ratcheting up the rhetoric with the Chinese, this time attacking his formerly good friend President Xi. The personal nature of the tweet attack feels different from the other recent ripostes. When the White House gets more ad hominem it means get ready for a world of hurt for those who need world trade to be strong, meaning the international techs. In other words, the divorce from main street is only more pronounced by what's leading us down.
My conclusion: the market may be down but, once again, the decline's about the White House getting re-tough on China. The pain on Main? It's left mainly on the plain, not on Wall Street? Got it? I think you've got it.