What is going on with the stock market?

History has it that a young man once found himself in the immediate presence of the late Mr. J. P. Morgan. Seeking to improve the golden moment, he ventured to inquire Mr. Morgan’s opinion as to the future course of the stock market. The alleged reply has become classic: “Young man, I believe the market is going to fluctuate." (1)

It's certainly fluctuating now. What is going on?

Let's lay out the bull and the bear case for the market. While you are trying to spear that hot dog on your Memorial Day grill - you know the one that spins when you don't hit it right in the middle - you can think about this.

The bull case rests on four fundamental ideas. The first: the U.S. government will prop up the bond and stock market, given that most Americans' retirement depends on them. Whether this is capitalism anymore is a separate question.

The second: there is a lot of cash spewing into the system, like a firehose swinging around with no one manning it. Eventually the cash has to find a home somewhere. Some of it will end up in the stock market.

The third: with bonds priced so high and coupons paying so little, the equity premium of the stock market rises. In other words, as bonds pay less, the relative value of cash flows from stocks must increase by definition.

The fourth: the market looks through the current crisis, anticipates a vaccine for 2021, and considers that significant pent-up demand exists in the economy. (Observation: looking at people in Burlington, VT this certainly is true for hair dressers. It's starting to look like the 1970's around here.)

On the other hand... the bears would say:

Are you kidding? The bottom has fallen out of the economy. Those traders on Wall St, tanning in the light of their Bloomberg Terminals, have no idea how bad this is on the ground. The badness falls into these buckets:

States that opened up a month ago are still seeing increases in unemployment. The V-shaped recovery idea is dead. 40 million people have filed for unemployment.

When a business restarts, it does not hire the full slate of workers back. Assuming it can survive at all on the reduced demand, it will do so cautiously with a skeletal workforce.

Consumer behavior has changed. It will take a long time for trends to revert to the mean, and many consumers have learned they don't need all that stuff to have a good life anyway.

Even if a business can operate, there are so many alterations to its operations that profits will be thin to non-existent. This effect includes public companies, and earnings will suffer for a long time.

The economy cannot run efficiently for a large percentage of the population without children being in school.

There you have it. Those are starter conversations for your Memorial Day, if you ever get the hot dog off the grill. Have a nice weekend.

Dan Cunningham

1. Laurence Sloan wrote this in his 1927 book Security Speculation - the Dazzling Adventure. It might be apocryphal. It has also been attributed to John D. Rockefeller.

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