Why The Dow Has Not Crashed A Second Time - Yet


Jul 28, 2020

Newsletter by Mary Buffett

Aside from the month of March, where the Dow Jones briefly crashed from its height of nearly 30,000 in mid-February to 18,591 five weeks later, the exchange has rallied of late and it’s in a trading range of somewhere between 25,000 and 27,000.

The question people should be asking is this:  In an environment where since March 45 million Americans filed for first-time unemployment and 32 million still remain on some form of unemployment assistance, what is keeping the Dow from entering into a death spiral?  Why is the Dow still only off by roughly 15% from its all-time high when the situation on Main Street is so dire?

We all know that the Dow is not the economy, but there are millions of 401k plans that are tied to its rise and fall.  For those families who look at their 401k investment statements as their only nest egg, a second crash will signal the deep psychological and economic wounds that will take a generation to heal.

From a Labor Department news release dated July 16, 2020, “The total number of people claiming benefits in all programs for the week ending June 27 was 32,003,330, a decrease of 433,005 from the previous week. There were 1,632,689 persons claiming benefits in all programs in the comparable week in 2019.”  This means that things today are 20x worse than they were only 12 months ago.

So why is the Dow not tanking?

It’s because when Coronavirus hit the American economy hard and the nation’s centers shut down, federal policy members and political leaders quickly cobbled together a temporary a safety net so that basic bills would get paid.  The unemployed received direct payments of $600 per week. The Paycheck Protection Program (PPP) provided small businesses up to 8 weeks of funds to pay their employees, so long as they remained on staff. PPP funds could also be used to pay other bills that are critical to staying in business.

Building major policy initiatives on the back of an envelope is never perfect.  There are some who made far more on unemployment than they did working at their jobs.  There were other companies who should have never applied for PPP funds and had to be publicly shamed into returning the assistance, like the NBA’s Los Angeles Lakers, which has a franchise value of roughly $4 billion.

However, the conventional thinking was that the virus would impact the American economy for a 90-day period, before fading out.  The American economy would experience a version of a “V recovery,” just in time for the November election.

It has not worked out that way at all.  In many respects, most of the wounds the American economy experienced since the initial wave have been self-inflicted. European leaders were far more focused and provided national solutions to national problems.  The restrictions upon these European communities were far stricter than those found in the United States and there was political and economic support from all quarters of their societies.

We all watched as New York Governor Andrew Cuomo gave daily updates to New York residents nationally on every basic cable outlet as the virus hit its peak and then began to slide downward. However, many other Governors took their eye off the ball because they mistook New York’s success as a signal that they could now reopen up their states. As a result, political leaders in states like Florida, Texas, and Arizona found themselves in a difficult situation because the virus spiked upward just as they were trying to open their doors.  Even states like California, which had been hailed by many because of its initial ability to flatten the numbers, found that the virus roared back in Los Angeles, as well as the surrounding Southern California counties.

This brings us back to the current Fiscal Cliff, which is timed to hit the American economy on July 31, only a few short days away.  If Congress and the White House fail to extend the $600 weekly direct personal assistance (with the minor tweak that their assistance cannot exceed their income prior to unemployment), the marketplace will harshly punish policymakers for their inability to keep the nation afloat and keep the basic bills paid.

In early July, President Trump extended the PPP for another 5 weeks until mid-August. However, continuing the $600 weekly support for those who are unemployed is very much in question.     

We now know that this virus will move throughout the country in waves and spurts. The areas that escaped the initial spike will sadly find themselves whip-sawed when the virus comes in force to their town.  We also know that the virus has a mind of its own and will not listen to any political leader or medical professional. The President is finally talking about the importance of masks, but it should have been said several months ago when the nation was initially reeling.

We have also learned a number of lessons since The Great Recession came to the United States in 2008. First, families learned that if they cannot afford their mortgages, they will simply hand their keys back to the mortgage company as part of a strategic default and then buy another home at a later date. Banks and other mortgage lenders learned that they don’t want to become property managers due to millions of strategic defaults. They realized that if they can keep families in their homes, even during moments of economic peril, properties will retain their value and the economic situation will right itself. It took years for property values to recover after The Great Recession, but we are perilously close to watching history repeat itself.

That is why there is a basic virtue to extending an updated version of the federal $600 weekly assistance until the virus shows signs of ebbing. This might take us until at least the end of the year. It keeps things stable in perilous times.

Sometimes the stock market has the emotional intelligence of a hyperactive teenager. It overreacts, sometimes wildly. It then overcorrects, wilder still, until it finds a safe harbor which to rebuild again. We’re in a temporary safe harbor at the moment, but the political calculus could change, and the financial picture would quickly darken. Right now, bills are being paid and a nation is hanging on, if only by our fingertips.

However, if the $600 weekly assistance goes away at the end of July, look for the stock market to punish policymakers who called for its removal and sadly, the collateral damage will impact us all.

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