We see articles daily writing about the "crazy" divergence between Main Street, where the economy remains weak, and Wall Street, which has experienced an unprecedented surge with the NASDAQ hitting all-time highs. This chart from ZeroHedge.com (This Might Be The Craziest Thing I've Seen in My Stock Market Career) captures it well.
Like many market commentators and practitioners I read about, I'm puzzled by this divergence, and attempt to offer explanations on why this may be the case:
(1) The market is looking at future earnings beyond the COVID lockdowns;
(2) Small, and supposedly less sophisticated, retail investors are driving the markets up, setting the stage for a collapse;
(3) The massive amounts of liquidity from the government stimulus programs and the Fed's easing policies has found its way into the stock markets;
(4) Investors are betting that investing in companies is a far better way to hedge against the potential inflation caused by the government's intervention than holding cash and bonds (which do less well inflationary environments--see my Book Summary: Common Stocks As Long Term Investment) or real estate (which are suffering from the triple whammies of losing retailers to e-commerce, employees working from home--some permanent, and big-city residents moving away to escape the pandemic);
(5) The tech-heavy NASDAQ has benefited disproportionately from the pandemic, which has accelerated society's shift towards online platforms: Facebook, Amazon, Apple, Netflix, and Google are the very obvious examples;
(6) Larger publicly-listed companies typically have stronger balance sheets and better access to capital to withstand a lengthy economic shutdown. Harsh as it sounds, it is easier for a bank to foreclose on small mom and pop borrowers than to force a large client into bankruptcy. As this pandemic lockdown drags on, an increasing number of small and regional companies will fold, leaving their customers for their larger competitors. Potential beneficiaries include Starbucks, Booking.com, and Chipotle (Strategy: Applying Lessons From Historical Pandemics);
(7) Elimination of companies that no longer have a reason for existence: Firms that have not evolved to adapt to today's environment (e.g., JP Penney), will be forced to fold or emerge much smaller. This will make room for the fittest and most efficient players to serve the customers they leave behind.
Whether or when the markets will take another sharp tumble is anyone's guess. However, I hope these are plausible explanations for what many see as a bizarre and unprecedented divergence between Wall Street and Main Street.
Analyst's Disclosure: I am/we are long SBUX, AAPL, BKNG, AMZN.
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