Stock Market Performance Shows a Market Increasingly Divorced From Reality
Last week saw the publication of some of the worst job market figures in history. Over 20.5 million people fell off payrolls, while the unemployment rate shot up from 4.4% in March to 14.7%, the highest figure since the Great Depression. And the response of stock markets was… to keep going up. Yes, that’s right, the Dow Jones ended the day last Friday up over 450 points, as investors seem to keep brushing off bad news. In fact, it often seems like the worse news gets, the better stock markets perform. What gives?
What’s happening is that retail investors are buying into hype about a mythical economic recovery that isn’t going to occur. They’re hoping that the economic recovery will be V-shaped, even though there’s every indication that it won’t be. In Texas, for instance, only 36% of businesses eligible to reopen ended up doing so. With numbers like that, any recovery back to “normal” will take a very long time, and with an economy that was on the verge of a recession anyway, normal could be years away.
Those investors buying the hype will be left holding the bag when the bottom falls out of markets. Preliminary estimates from the Federal Reserve are for a 35% drop in GDP in the second quarter, an enormous Depression-level decrease. And with so many businesses set to file for bankruptcy after being shut down for months, numbers for the rest of the year may not be any better.
The 14.7% unemployment rate may even understate the extent of the problem, as the U-6 unemployment rate, also known as the “underemployment rate” is now at 22.8%. And those numbers aren’t even including workers who have been temporarily laid off, which could result in up to 5 percentage points of increase. So the real unemployment rate is likely closer to 20%, while the real U-6 rate is probably closer to 30%. Those are staggering figures.
Yet despite the reality of major job losses, the likelihood that many of those losses are permanent, and the increasing fears that many Americans have about losing their jobs or their houses, for the first time ever a majority of Americans believe that stock markets will be higher next year than this year. Yes, that’s right, our economy is literally falling apart, yet people still think stock markets are going to recover. That’s how disconnected markets are from reality right now.
Eventually reality will set in, and in a big way. Those who think that stocks will be higher a year from now will find out the hard way that we’re facing a crisis that will likely be even bigger than 2008. And those who haven’t taken steps to protect themselves and their investments will face losses like 2008 or worse.
Imagine losing 50, 60, or even 70 percent of your retirement savings in a matter of months? And imagine knowing that you could have done something to protect against that, but you didn’t.
That’s how many investors felt in the aftermath of the 2008 meltdown, as they watched their retirement savings circle the toilet, while gold and silver shot through the roof. Many vowed that they wouldn’t sit idly by and watch their retirement portfolios suffer the same fate again, which is why many have rolled over 401(k) assets into a gold IRA, taking advantage of the tax advantages offered by an IRA and the wealth protection offered by gold. If you haven’t protected your retirement savings already, what are you waiting for?