Stimulus Check Boost May Only Last A Day

Yesterday we got a big boost in the equities market with better than expected retail sales.  We heard a lot of reasons for this and most notably was the stimulus checks.  I think there’s no doubt they are a shot in the arm for the economy but it’s putting a band-aid on a patient needing open heart surgery.  I’m a long-term bull not only on our economy but the world economy.  Too much good stuff going on.  There’s no secret there.  But, you can’t expect an economy that’s been slowing down to just turn like a V.  This economy is trying to recover and is very resilient probably due to that global growth.  But, it’s like stopping a train and going the other direction on a dime.  Economies roll over and turn back up slowly.  That’s the way it is.  

This morning, we had more economic news come out showing that the unemployment rate is now 5.5%!  This was the biggest increase since 1986.  Confidence is awful and oil may have just been a dip not a correction (more on that in a bit).  Again, let me stress that when things are this bad you have to look forward because studying economies is like looking at a circle.  A slowdown is followed by a pick up.  The problem is many are anticipating that pick up happening tomorrow because of stimulus checks.  I don’t see it.

I posted a picture a while back of the unemployment rate inverted on top of the S&P 500.  It’s very correlated and obviously you can’t just use one picture to invest.  But, it goes into the equation of am I bullish or bearish on the market.  Below, I’ve updated the picture with today’s data.

Less Jobs, Lower Prices For Stocks
Fig. 1

In orange you can see the S&P 500 and in white is the unemployment rate inverted including today’s data.  A negative divergence is building where the unemployment rate is falling and the S&P 500 has some catching up to do on the downside.  Now, some would argue that perhaps the market is anticipating a bottom as it did in 2003.  That may very well be the case but this decline is much sharper than then and I think we have bigger problems than we did then.

With oil near $130 again, confidence very low, unemployment now at 5.5% (and still going up), and investors not in the mood to buy stocks,  I have to be cautious.  Feel free as I am to be buying long-term positions in beaten down areas but just don’t do it unhedged. 

We were oversold and so the market has had a pop but I think this market may continue to drift down and frustrate investors over the next few weeks.  We may not go down 20% and have a horrible bear market, but drift and lose people a lot of money nonetheless.

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