Things have been pretty quiet around the Reilly house at what should have been an especially chaotic time. My middle son graduates from high school tomorrow and we were going to celebrate in style. In the post pandemic world my son will be graduating from home while participating by WebEx. The raucous celebration that we were planning will have to be tabled for now. The market has been like the Reilly house – too quiet. Since April 28th the S&P 500 is up a scant 0.76%.
We may look back on this as the greatest psychological experiment in human history. Books will be written and this period will be studied for a long time. I have been out to play golf but my family has been sheltering in place and they are ready to get out. I keep getting questions about what things are like in Georgia – mostly from New York area residents. As the governor has opened things up again it appears that people first ventured out without much thought as they appeared relieved to just be out of their homes. Masks are now becoming much more prevalent in indoor areas. In recent blog posts I touched on the topic of how consumers would react coming out quarantine.
The research that I am seeing says that in the post pandemic environment people will be more reluctant to spend and save more while corporations are forced to bend a bit to labors will. That’s not what I am seeing. The consumer seems to be going right back to the “Live for Today” attitude. Let’s see if that shows up in the data. That would be a boost to the economy. Additionally, a large percentage of unemployed people are now receiving more cash than they were before they were taken off the pay roll. We expect that the initial burst of spending will be met with a hangover as the economy hits a speed bump.
We keep getting the same question – Why is the market almost back to old highs? We have explained that systematic computer based strategies are in charge and the way risk is deployed in the options markets continues to hold sway over the equity indexes. In that world the marginal buyer calls the tune. For the last decade that buyer has been the corporate buy back. It may now be the day trader.
We are seeing compelling evidence that unemployed and under employed people in quarantine have begun to day trade. Nothing else to do! Might as well place some bets and make some easy money. Option markets are seeing an all time high in percentage of small lot orders. Coincidentally, firms like Schwab and E*TRADE recently began to offer no cost trading.
We have seen hedge funds and pension funds back away from trading as this hopefully once in a lifetime event had them lowering risk. Combine $0 commission with lots of free time and you have a combustible combination. The retail investor is now more influential than at any time since the Dot Com Bubble. When the small retail investor is leading the market it might be time to pare back on risk.
There is a huge disconnect between where the market is valued and how the global economy is positioned. There is no way of avoiding a recession at this point and we could bump along the bottom economically for a time. We still see Fair Value on the S&P 500 closer to 2350-2500 area. This is an unloved market rally as hedge funds and pension funds have gotten left behind. While logic would say depression era levels of unemployment would equal lower stock prices the machines and small investor aren’t seeing it that way.
The money printing by the Federal Reserve and other central banks enables one to make a case for some rebound in equity prices – but this much? Getting into the money printing business is easy. Getting out will be all but impossible. Once the market is hooked on the free money you will never get them off of it.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.