The Market-Economy Disconnect: A Disaster Waiting to Happen

If you line up the state of the U.S. and global economy next to that of the world’s leading market indices, you might just get the impression that the stock market has gone completely mad.

If you’re one of the many people landing on this conclusion right now, it would be difficult to argue that you’re wrong.

It’s been nearly two months since the National Bureau of Economic Research officially declared that the U.S. has entered into a recession, with economic expansion peaking in February, after a record 128 months of growth. The bureau’s Business Cycle Dating Committee described plummeting employment and production as being of “unprecedented magnitude.”

Meanwhile, the Nasdaq Composite is trading at record highs while the Dow Jones and S&P 500 approach their own. Main Street is burning, but Wall Street is having a celebration.

Welcome to America in 2020

Up until this week, markets have buoyed heavily on the promise of a sharp recovery, the argument being that this is nothing more than a temporary, pandemic-induced downturn. Once we get a vaccine for coronavirus, the world will return to normal. Just a few weeks of lockdown and then it’s all uphill from there.

What initially began as a few weeks of staying inside, though, has turned into many months of economic stagnation, still with no clear end in sight. We are now roughly half a year into this pandemic, yet new unemployment claims are climbing — to 1.416 million this week. All told, we’re facing the 18th straight week in which new jobless claims totaled above 1 million.

As the idea of a “V-shape recovery” becomes increasingly less plausible, we’re also running into the threat of a significant income cliff for many American families. In just a few days, recently expanded unemployment benefits of $600 a week will disappear for nearly 25 million Americans currently out of work.

Of course, Congress is crafting a second stimulus bill to bail these Americans out one more time, but we all know this is not a sustainable way to run the economy. Eventually, Americans need to get back to work to get the gears turning again, which is why Republicans are leaning towards a proposal that cuts those unemployment benefits while adding a return-to-work bonus.

By the time this publishes, the details on that stimulus bill will become more clear than at the time of this writing, but nothing in that bill is going to change the fact that the economic machine isn’t running like it should be. You can incentivize people to get back to work all you want, but if there is no work for them to do, what’s the point?

According to the U.S. Bureau of Labor Statistics, there were 16.78 million people working in the hospitality and leisure industry as of December 2019. With bars and restaurants across the nation still being forced to close (some states are tightening restrictions even further), a massive portion of these Americans are without a viable option for work.

Now tack on the plight of physical retail. Nearly 15.7 million were employed by retailers in February according to the Bureau of Labor Statistics. That number has been cut to 14.4 million as of June. All told, retail employment is down 13% year over year.

Even as the pandemic lets up (assuming it will) many of these jobs may still never return. Retailers are realizing they can move products with less employees and consumers are realizing they can avoid the hassle of waiting in lines with services like delivery and curb-side pickup. It’s all great news for Jeff Bezos and Amazon (NASDAQ: AMZN), but a disaster for physical storefronts and workers.

We can only hope that, over time, these retail and hospitality workers always have the ability and wherewithal to transition to other high-demand industries, but you’re not going to teach an army of bartenders, waitstaff, and cashiers to code or to install HVAC systems overnight. I worry that many of these individuals will unfortunately get caught in a downward spiral, the economic consequences of which have clearly not yet been reflected in the stock market.

Canary in the Coal Mine?

Now, if any single stock has epitomized the enormous disconnect between stocks and the economy lately, it’s Tesla Inc. (NASDAQ: TSLA). The company reached a record valuation of $305 billion at its high this week, making it larger than the world’s three largest automakers combined. Yet the company just reported a 4.9% year-over-year revenue decline, even with its much anticipated expansion into China.

Some may want to give Tesla a pass for this — we’re in the midst of a pandemic after all — but Tesla didn’t close operations for long and China began lifting lockdowns as early as April. The country also has 1.4 billion people and this was effectively Tesla’s product launch in the region.

As far as U.S. sales are concerned, Tesla’s customers are wealthy techies ordering these cars online, not penny-pinching window shoppers. The demand should have been there.

At the very least, that is what the company’s valuation would suggest. Tesla’s stock price positions it as though it were a hyper growth firm, but the sales figures simply do not support that narrative. The only real growth vehicle Tesla has going for it at the moment is selling regulatory credits to other automakers. 

The parallel between Tesla and the broader stock market at this point is difficult to ignore. Both are being propped up by government stimulus and overconfidence, as valuations split further and further away from reality. My bet is if we’re heading for a crash, Tesla will be one of the canaries in the coal mine, and the company is giving up ground as I write.

If history has told us anything it’s that these moments of irrational exuberance rarely, if ever, end well. As someone who sells stock tips for a living, this isn’t something I like to admit, but my job isn’t to sugarcoat things; it’s to spell it out like I see it. And the way I see it is this: We’re operating in an extremely dangerous environment for investors, who aren’t even close to prepared.

Until next time,

Jason Stutman

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