The stock market is roaring back in the face of incredibly negative news of job losses, a deep recession and the specter of an uncertain economic recovery. Over the course of my career I have certainly seen moments of disconnect between the markets and the real economy. But, it’s safe to say that I’ve never seen as wide of a disconnect as I see today.
During a very short five-week period from mid-February to late March, the stock market cratered about 40% and bonds nosedived. Not only was there no place for investors to hide, there was almost no time to hide. Now, a little more than two months later, both stocks and bonds have profoundly rebounded. While the pace of the recovery cannot be overstated, the feeling of whiplash for investors cannot be understated.
Thanks to the unlimited backing of the Federal Reserve and Congress, Wall Street looks like it’s back, for now. But, let’s briefly review what’s happening on Main Street.
We have about 30 million people collecting “official” unemployment. While this figure changes from week to week, it’s important to note that a growing number of employees are also being added back to payrolls, even if they aren’t really back to work. Many of their paychecks are being covered through loans that will be forgiven if the business promises to act as a “shadow” unemployment system. Between the official and the shadow unemployment system, it’s probably safe to say that around 35 million to 40 million people who worked just a few short months ago are no longer working today. The combination of official and shadow unemployment represents a Great Depression-like 20% to 25% of the approximate 160 million people counted in the nation’s workforce.
As the economy’s reopening process unfolds, we should certainly expect many people to go back to work in some capacity. How many will head back is entirely dependent on the pace and path of the economic recovery. And, of course, much of that will be dictated by our collective approach to mitigating the spread of a novel virus that has no vaccine, limited therapies and no end date.
Adding to these uncertainties, as people do get called back to work, many face a cut in income as their official unemployment benefit currently exceeds their former paychecks. The funding source that provides for the extra $600 per week in unemployment benefits is slated to end on July 31. To complete the picture, our new shadow unemployment system’s funding source, provided through those forgivable small business loans, is also finite and temporary. The dual expiration and depletion of the official and shadow unemployment systems are an economic cliff eerily reminiscent of Thelma & Louise.
As Wall Street miraculously booms once again, Main Street’s position looks much more precarious. This disconnect was aptly illustrated by Senate Majority Leader Mitch McConnell’s recent declaration that their next piece of financial aid legislation will be their “fourth and final” bill. To put it bluntly, I very highly doubt it.
Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com