what stock prices are (and are not) saying

–he key leading indicator for economic forecasters of the US economy is the domestic stock market. Wall Street tends to lead GDP by around six months, both on the upside and downside. That’s because financial markets react to changes in government, mostly monetary, policy immediately, while companies and individuals take more time (i.e., six months) to adjust.

The stock market is where it is today because the Washington floodgates have been opened to keep the economy afloat during the pandemic. The fact that this is also an election year hasn’t hurt. On the minus side of the ledger, the reverse Midas touch that Trump showed in a uniquely unsuccessful business career has carried over “bigly” into his time in the Oval Office. Despite massive government stimulus at the start of his term, he has somehow managed to bring the US, an unusually vibrant and resilient place, to a grinding halt even before COVID struck. His destructive “it’s a hoax” response to the virus has added to this misfortune. We’re now watching new cases proliferate here while the EU is starting to open up again–crediting US medical research as the reason why.

Prices seem frothy to me–and I’m usually late to seeing market tops. Still, while fiscal and monetary policy are creating lots of extra money sloshing around in the system, it’s hard to see the stock market going down a lot. Thinking about leading indicators, this probably requires the pandemic spread to lose momentum–hard to do given the way Trump has politicized taking safety precautions. Also, Trump’s recently amplified race hatred rhetoric will scarcely induce investors to give up the capital flight theme. Part of me wants to delete this paragraph, because predicting absolute ups and downs (vs. relative value) is notoriously difficult. Nevertheless, it’s what I think.

–The counter-trend rotation into economically sensitive stocks isn’t happening. There have been many attempts by the market over the past month or so to shift from tech to consumer recovery names, but all have been nipped in the bud. There is a kind of mini-rotation taking place inside tech–days when pandemic beneficiaries like Zoom are strong and reopening beneficiaries like Paycom are weak, and vice versa. But that’s not the same.

Not all stock investors are happy, though. More tomorrow.

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