Prescient or Pollyannaish? Explaining the market’s rally.
Blue chips rallied 2.2% last week despite a parade of grim news such as soaring claims for unemployment insurance and plummeting retail and industrial activity.
Is the stock market telling us something? Could it be fulfilling its role of predicting the future of the economy? Maybe its lulling into a false sense of hope for an economic recovery? Perhaps it is confused and as uncertain about the future as the rest of us!
I believe “To be or not to be” is from one of Shakespeare’s plays. The question today is “prescient or Pollyannaish”?
Not only do we want to know what the new normal is going to be, but as importantly – when?
As ugly as this chart is, I can only hope its at least about right!
I’m confident of a recovery, but this looks a lot more optimistic than seems likely. Although the first stage of the recovery may be pretty strong, I think the remainder will be much more gradual.
Of course, the caveat to any of this is that it is dependent on the health care issues stabilizing. It would appear that amy be the case for some parts of the United States, others may have a long way to go.
So far, the, known, impact has primarily been in developed countries, many of which struggled with managing the health care issues. What happens when it takes hold in the less developed countries, who at best have limited health care abilities?
Let’s hope for the best, but we now know the worst case is possible.
The rate of change and disruption caused by COVID-19 is stunning by almost any measure.
The first chart shows the extra-ordinary magnitude of the individuals filing for unemployment insurance the last three weeks.
Whether Google searches are a good leading indicator or not, I don’t know. But, at least for now let’s hope that it can be in this instance. This chart would suggest that number of claims filed may have peaked or will at least start a downward trend.
This is from the NYT – Morning Briefing. I believe the Q&A is with Ron Lieber.
Will the U.S. economy bounce back to where it was before, or do you expect lasting changes?
If we continue to believe that capitalism and market economics are the right way to structure our country, then there probably ought to be at least some way our economic activity will revert to some level of normalcy. I would not believe anybody who is trying to predict when that will be.
You’ve written in the past couple of months that despite the tumult in the stock market, most people should pretty much sit still. Is that still the case?
All the best economic science tells us that if — and it’s a big “if” — you’re willing to stay invested in stock for decades and decades, if you just sit still more or less, keep putting money in at regular intervals, and sell some stock when stock prices get too high and buy some stock when the prices fall, you will do better and earn more than most professional brokers.
Now, that’s a science-based answer — it’s not quite a behavioral-science-based answer. I recognize that there are people who have never been psychologically tested in this way.
It would seem the bottom line answer is if you have faith in our market economy and democracy, things will eventually return to ‘normal’.
Right now, we may not know what ‘normal’ will look like, but we will get there.
The bigger challenge will be when and that is the big known, unknown.
The following chart visually shows the variability of S&P 500 since Janaury 2019. Cleary the ‘market’ has been quite volatile in the last few weeks. We’ve has extreme up days and extreme down days. Unfortunately, way too many of the downs rather than ups.
I have used Standard Deviation information as a proxy for Variance for quite some time. Today I took the time to check out a YouTube video to refresh my understand of definition of arithmetic mean, variance, and standard deviation. Check it out if you are interested.
Without getting too deep in the weeds on the details, I’ve used the three arithmetic mean compared to the standard deviation for that data set as a short hand proxy for variability. In essence, one standard deviation gives an indication of what the historical results were approximately two thirds of the time. The closer this number is to the historical mean, the closer I think you could expect the future mean to be to the historical mean.
For reference, two standard deviations provides an indication of the range for the historical mean 95% of the time. Clearly the volatility in the stock market is resulting in return variance significantly beyond what we have experienced in recent time periods.
That about sums up my knowledge and capabilities with statistics. However I’m sure you have seen the chart for unemployment insurance claims that came out last week. Somewhere I saw that the weekly number was 12 standard deviations from the expected variation based on the entire history of that data set.