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Argent in the News

Nickaus: The economy is bad. The stock market is booming. What gives?

28 May 2020

(St, Louis Post Dispatch)

May 28,2020 (Dave Nicklaus)

It’s hard to square a skyrocketing stock market with a plummeting economy, but the U.S. has both right now.

Stocks have soared 37% since they hit a pandemic-related pothole in mid-March. The economic news since then has been unrelentingly bad, with unemployment soaring to depression levels.

The market, however, looks forward and not sideways. The pain we’re feeling now is
exactly what investors anticipated when they bailed out of stocks in February and early March. Now, they’re looking past that pain.

“It makes sense,” says Alan Skrainka, chief market strategist for Krilogy in Creve
Coeur. “Today’s headlines reflect today’s news, which is admittedly pretty bad. The
stock market is looking six months down the road and anticipating a rebound in the

Ken Crawford, senior portfolio manager at Argent Capital Management in Clayton,
ticks off a list of developments underpinning the market rally: Massive stimulus from
Congress and the Federal Reserve, a recovery in places like China that experienced the pandemic before the United States, and progress toward a COVID-19 vaccine.

Also, the worst-case scenarios that were imaginable in March didn’t come to pass. In
most parts of the country, numbers of new infections and deaths are falling.

“The data indisputably are better and you’d expect the market to react to that,”
Crawford says. “There are reasons to be enthusiastic, even if you can argue about the magnitude of the recovery.”

He has noticed an encouraging change in the market’s leaderboard. Technology
companies led the rally in April and early May, but lately they’ve been joined by banks and other beaten-down stocks. J.P. Morgan is up 21% in the last two weeks; Delta Air Lines has risen 36%.

“You’re seeing more economically sensitive stocks lifted relative to the market as a
whole,” Crawford said. “That’s music to our ears.”

Crawford thinks the banks, in particular, were hurt by investors’ memories of the last recession in 2008 and 2009. Their profits may be hurt by problem loans this year, he says, but banks are well capitalized and should survive the crisis in good shape.

If you’re still wondering why the stock market looks so much rosier than the economy in your neighborhood, consider that hard-hit industries like hotels, airlines and restaurants make up a relatively small part of the big indexes.

The technology and communication services sectors — representing such giants as
Alphabet, Amazon, Apple and Facebook — together account for 36% of the S&P 500.
Even in a recession, those companies are doing fine.

Gerald Sparrow, chief investment officer at Sparrow Capital Management in St. Louis,
looks for businesses that are growing consistently, and his Sparrow Growth Fund is up 5% this year.

Sparrow thinks growth will be easier to come by in the later part of this year. “I think
consumers will take their foot off the brake and give their spending some gas,” he said. “I think we’re going to be surprised, probably by year’s end, by the growth of the economy.”

Investors may already be surprised by how fast their portfolio has bounced back.
Stocks fell 35% in one brutal month as the coronavirus spread across the country;
they’ve now recouped three-fourths of that loss. The S&P 500 is down just 9% so far
this year.

The index, in fact, stands 8% higher than it was one year ago, when nobody had heard of COVID-19. The virus has changed our lives in many ways, but the stock market doesn’t think it has changed the economy’s long-term growth path.