Weekly unemployment claims came in at 898K. This was worse than expected and above last week’s 845K reading. There is evidence the unemployment claims number is broken at the moment. What we do know is the jobs market still has a lot of healing to do, and it's likely to take years to fully recover. This will keep the Fed in play, so I don’t see this as much of a market event unless the claims were to really spike higher again.
Continuing claims continues its trend lower (positive) from absurdly high levels. Remember it took about 5 years for continuing claims to recover from the 2008 financial crisis. It’s not going to happen overnight. The Small Business optimism report cited an increasing number of businesses looking to hire in the near future. And not just for temporary seasonal positions either.
On a positive note, retail sales crushed estimates. The chart above shows the V shaped recovery. It doesn’t get much better than that. After 2008, it took 2 years for retails sales to recover. We just recovered in about a quarter.
Between New Home Sales, Retail Sales, and consumer confidence, the consumer is still alive and well. I think we need some fiscal support targeted to those that need it the most (you can’t take peoples jobs away and then not provide temporary assistance), but the above data points are one reason I believe the economy won’t dip back into recession if policymakers fail to reach a deal.
Despite consumer confidence, investor confidence appears to be at an all-time low. In looking through JP Morgan’s excellent Guide to the Markets chart pack, the above chart stood out to me.
This year investors sold $165 billion worth of US equities through the first 3 quarters. This is far worse than any other time in recent history – including 2008. The inflows into bonds and money market funds have been tremendous.
It’s clear people are scared. But the safety trade is a terribly expensive one! For all the talk about how stocks are overvalued, fixed income is far more overvalued at the moment. The Fed is basically telling you that all money invested in fixed income will only lose money to inflation for years to come.
I take these results as a bullish sign. Bull markets die in euphoria, not when everyone is hiding money under their mattresses. I’m not advocating taking on more risk than one can handle. I subscribe to Buffett’s perspective of “not owning more stocks in a bull market, that you can handle in a bear market.” I’m saying don’t let fear keep you out of good investments. Don’t follow the crowds.
I got some feedback on my prior post regarding how I could possibly think the market could trade 27x earnings in the face of a pandemic and (insert your favorite scary headline). It wasn’t a prediction. The market currently trades about 21x earnings as is. If you don’t think valuation could get to 25-30x level when there is a return to confidence (possibly by mid 2021 – depending on the course of the virus) while the Fed keeps rates pinned to 0% for possibly years afterwards, then you are underestimating the upside risk.
Yes, there is an upside risk. Everyone wants to dwell on the downside risks. I get it. Talking about how things could get better than people expect, doesn’t sell. The outflows out of stock funds confirms this. We are in uncharted waters and no one likes uncertainty. Investing isn’t easy, otherwise, we would all be 100% invested in stocks and getting our 10% annual average returns. Stay the course.