Irrational Exuberance 2.0: Bounce, Gut Check, Swoosh

July 01, 2020

The phrase "irrational exuberance" was used by Alan Greenspan in late 1996 during the dot-com boom of the 1990s; it was interpreted as a warn­ing that the stock market might be overvalued given an apparent discon­nect between stock performance and underlying fundamentals, such as profitability. We may be experiencing Irrational Exuberance 2.0 right now, as our stock market has rallied back to near January 2020 levels, despite the highest unemployment figures since the Great Depression. While we are not in the business of making short term market projections, the sudden, sharp market increase has certainly grabbed our attention.

The US stock market, measured by the S&P 500 index, dropped 34% from its all-time high on February 2020 in reaction to the Covid-19 lockdown and related economic downturn. Then the market roared back, rising nearly 40% during a 50-day period ending June 3rd, 2020, the biggest 50-day bounce ever. In support of such an upswing, there were record stimulus measures from the federal government and the Federal Reserve and many states showed actual declines in Covid cases and began to reopen their economies. We have also witnessed an astonishing number of global pharmaceutical companies in partnership with government entities work­ing on all phases of medical treatment. Lastly, consumers so far appear resilient and the unemployment rate surprisingly fell during May. Despite these positive developments, many questions remain.

The Covid-19 crisis has already shaken some venerable US corporate names, a real gut check for investors. For example:

• Starbucks announced on June 10th that it was closing 400 locations permanently.

• Hertz, the largest US car rental company, filed for bankruptcy in late May.

• Retailers JC Penney, Neiman Marcus and J.Crew, as well as energy com­panies like Diamond Offshore Drilling filed for bankruptcy in recent months.

In addition to these corporate developments, unemployment could remain persistently high. The Official Unemployment Rate was as low as 3.5% in February of this year but stood at 13.3% at the end of May and a broader measure (U-6) stood at 21.2% by the end of May. The stimulus relief checks of roughly $1,200 per person (for incomes below $75,000) were a way for the federal government to mitigate the financial strain caused by the Covid-19 crisis but are scheduled to run out by the end of July. The re-opening of states from their "safer at home" mandates has varied by state and the full impact of the lockdown and gradual reopening won't really be assessed until August / September, when all restrictions are expected to be lifted, and of course many are worried about a second wave of cases with a full re-opening.

In a recent speech (June 12th, 2020) Fed Chair Jerome Powell indicated he could foresee a "long and uncertain road to full recovery". Market pundits have been trying to predict the shape of the economic recov­ery, including a sharp V but having grown up in Beaverton, Oregon, (long-time headquarters for Nike), I was amused that their iconic Nike swoosh brand symbol is now the preferred economic recovery shape. There are no easy answers with gradual re-openings varying by state and a virus we are still trying to grapple with. Pleasant surprises are always welcome, but the next few quarters could be bumpy, looking at both the economy and the stock market. Please contact us if you would like to discuss your portfolio and the appropriateness of its account allocations.