Hopeful About Economy but Cautious Stock Market
CVS and Walgreen annouced today that they will be start administering conronavirus vaccinations this Friday. So I remain hopeful the economy will recover very slowly. I am very nervous about the stock market.
The market has set another record today (February 8, 2021). I feel like the market remains hopeful that most of President Biden's $1.9 trillion packages will pass by the end of March. Is the stock market reaction correct? Is this stimulus enough to get people back to work and help reduce food insecurity? I don't know the answer to these questions. I know that our unemployment remains at 6.3%, and new job growth was only 49,000 last month. The Cares Act support is starting to run out, and people face eviction as rent payment amnesty begins to end. What is happening in the stock market does not reflect what is happening in the U.S. economy.
What is causing the stock market to set new record highs even as our economy continues to struggle because of the coronavirus aftermath? I have been working for answers to the question over the last year.
Yesterday I read a Yahoo Finance interview with Mr. Mohamed A. El-Erian, chief economist for Allianza Insurance and former Chief Investment Officer of Pimco Investments. If you have read my blogs in the recent weeks, I believe the present market is overvalued and risky.
Mr. El-Erian thinks that the market overvaluation is due to what he called a "rational bubble." Here is part of Mr. El-Erian's quote when asked about the overvalued market. "So you know, I've been pointing to the disconnect between financial and the real economy. You see, I love the phrase rational bubble. It is a bubble. But it's logical because there's so much liquidity being pumped into the economy. The problem with pumping in so much liquidity is that you encourage people to take too much risk. And therefore, the risk of a market accident goes up. Last week we came very, very close to a market accident-- very close. The GameStop retail investor coup could cause a crash more significant than 5% if various controls were not in place, but we came very close. And ask yourself the question, did anybody see this coming? And the answer is no. And that's the problem with market accidents. They're tough to spot beforehand. So the risk here is that this disconnect between the financial side and the economy, between Wall Street and Main Street, gets so big that you get an accident that puts pressure. And remember, it was a small bunch of stocks shorted. Then it was the rebellion by the retail investor that led to a 5% fall in the S&P. That's a tiny thing. The tail wagged the dog for a few days and would have wagged the dog more if the retail investors weren't frustrated from buying more of the stocks they were using for the short squeeze."
Another example of the disconnect between the stock market and the economy is Bitcoin. Goldman Sachs is quoting, "That any stock could get caught up in a Reddit-fueled belief that small-time traders had unlocked some secret to pushing around the market should perhaps not be such a surprise. Because if there is one asset that captures the investing zeitgeist today, it is Bitcoin. And much of the Wall Street community struggles to understand Bitcoin has no traditional fundamental value metrics that drive the price higher — what drives the value of Bitcoin is the price of Bitcoin and investor's greed. "
Elon Musk invested $1.9 million into Bitcoin on February 8, 2021, to drive up the price of Bitcoin to $44,000/Bitcoin. These higher Bitcoin prices attract additional interest from ever-larger market participants and tiny investors. Bitcoin investors are failing to see what happens when Elon Musk pulls his investment out of Bitcoin. Small investors will have no recourse but to ride their investment down the tubes. There is no government oversight, company assets, or country currency backing Bitcoin.
The all-time low-interest-rate provided by the Federal Reserve and the human greed as demonstrated by the rise of Bitcoin help explain the disconnect between the rising stock market and our floundering economy.
At this point, the risk of a market downturn remains high for now. The CNN Fear and Greed indicator continues to move to Greed indication. Our monthly review of our Vanguard 15 Index Funds still indicates the market a high level of risk.
However, AAII Sentiment Survey: Optimism Falls to a 13-Week Low.
Optimism among individual investors about the stock market's short-term direction fell to its lowest level in 13 weeks. The recent GameStop incident may have been a wake-up call for the individual investors to be cautious with their investments.
I cannot point to a specific action that makes me feel more confident about the economy. We do feel a sense of hope for the economy. The recent effort by the Biden administration does show signs that the Federal Government is trying to work for the people and not for a political party. The present administration is not waiting for the GOP Senate to take action. They are taking action by improving the vaccination process by having our military join in the vaccination effort, provide financial support, and the new CDC efforts to open schools safely for our children, parents, teachers, and school staff. The $1.9 trillion packages will not be the end-all to re-start the economy. I am not a fan of government spending. But the federal government has to go big to get the economy on its feet to help us try to get back to economic growth-more employment, lower: poverty rates, and better survival rates from the coronavirus. I am still hopeful we can get there, but it will take time.
My next blog will focus on Bitcoin. Is it a scam or for real?