Welcome to edition 526 of Insider Weekends. Last week was a repeat of the uptrend we have been seeing in the market with the S&P 500 up more than 1.2% and the Nasdaq up 2.2%. Over the last three months the S&P 500 is up over 12% and the Nasdaq more than 21%. Considering we had barely exited the first phase of COVID-19 before being hit by phase 2, the cognitive dissonance between the financial markets and Main Street is stark.
States like New York, New Jersey and Washington state that were hard hit in phase 1 have done much better now and both the rates of new infection and deaths are down. In contrast, states like California, Arizona, Texas and Florida are seeing huge spikes in both new cases and deaths compared to phase 1. With deaths lagging new infections by several weeks, we are likely to see a uptick in deaths in coming weeks unless new treatments like Remdesivir can reduce the fatality rate.
Going into this crisis, I was optimistic that this could be a one quarter event and that we will start seeing a rebound in economic activity in Q3 and Q4. Many countries around the world including Italy, South Korea, Japan, Singapore, China and Taiwan, to name a few, have achieved this. In contrast, the U.S., Brazil and India are having a hard time controlling COVID-19 and may see multiple shut downs and reopenings. Ample liquidity, the Fed actively participating in the markets and massive stimulus programs have helped with the positive market momentum and this momentum is drawing in both institutional and retail investors.
This situation reminds of the infamous words of Citigroup’s ex-CEO Chuck Prince from mid-2007 right before the housing crisis accelerated and triggered the Great Recession,
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing”