Happy days are here again (Never underestimate the stock market)

A few months back, I did a post discussing the stock market’s failure to correctly anticipate the impact of Covid-19. More recently, there has been widespread puzzlement as to what’s causing the recent rally in stock prices.

Today we have an answer to all of these questions. Real shocks simply are not as important as everyone has assumed. While I’ve generally argued that real shocks are overrated, even I am somewhat guilty in this case, as I had assumed that unemployment was likely to rise to 20% in May. Instead, it fell to 13.3% and NASDAQ hit an all-time record. I was wrong.

Now we know what the stock market has been sensing for weeks; this depression is not what we thought. Also, kudos to Lars Christensen. We still don’t know if his “less than 6% unemployment by election day” will be correct (I’m still skeptical), but it’s looking much more plausible than yesterday.

Tyler Cowen links to a story showing that this may be the first dental office led economic recovery in world history. Heck, why even use the term “may be”? This is the first dental office led recovery in world history. And why not? Half the collapse in the first quarter was in health care, the one sector you’d think would do well in a pandemic. Personal income soared 13% in April, as unemployment rose 1000 basis points. Our economy is like Crazy Town in that old Betty Boop cartoon.

The entire recession lasted for two months. And no, the recovery was not entirely due to the end of lockdowns, as the data was mostly collected in the second week of May, when many big states were still closed down. (We’ll know more when we get the state-by-state data. It’s gradually getting safer out there, and businesses are finding creative ways to shield customers from the virus.

Again, never overestimate the impact of real shocks on the business cycle and never underestimate the amazing prescience of the stock market.

PS. Some pundits gripe and moan that the stock market no longer reflects the situation of average Americans. They are right, it doesn’t. Personal income is up dramatically since February, whereas the S&P500 is still down somewhat from February.

PPS. This also removes the last shred of doubt as to whether the slow recovery from 2008-09 was caused by tight money or real factors. It was tight money. Case closed.



30 Responses to “Happy days are here again (Never underestimate the stock market)”

  1. Gravatar of Michael Rulle Michael Rulle
    5. June 2020 at 09:34

    Bob Shiller’s highly unorthodox behavioral based theory on Trump still holds. The market is forecasting that radical left policies will not prevail—-which is a stone’s throw, albeit a long one, away from predicting Trump will win. Scott was almost giving up on Powell as forecasters and TIPS were predicting Fed falling far short of desired NGDP goals—which he agreed with—-don’t know how the wildly unexpected jobs numbers impacts that forecast—.

    While far from a proof—it put a ton of wet water on Tyler Cowen’s “irreversible non-linear permanent collapse” concept which is supportive (again not a proof but maybe a good prediction) of Scott’s strong disagreement with that concept.

    In absolute terms, of course, employment is still bad. I do not think the demonstrations will wet noodle this—after all, even avowed Antifa types have called their prtesting their “night jobs”

    I assume Covid does not care about all this—–but we might not care as much about Covid. The shocking casual police behavior resulting in the murder of George Floyd—may have shocked our system to the point where we are no longer “scaredy cats”—yet this is not even in the current economic numbers. Or better, perhaps we will do our best only on the facts of Covid which we are virtually certain to be true—protect the old—and stop obsessing why Japan is different than NYC.

    All I can say is “amazing”. My favorite comments are from those who “blame” Powell for propping up markets.

  2. Gravatar of Tacticus Tacticus
    5. June 2020 at 09:38

    Obviously you’ve dealt with these issues for a long time, but why can we not get the rest of the profession, not to mention policymakers, to better understand all of this?

    On the other hand, I’ve made a truly ludicrous amount of money buying cheap call options the last three months. Maybe it’s better for me if people are a bit dumb.

  3. Gravatar of Michael Rulle Michael Rulle
    5. June 2020 at 09:57

    PS–Forgot to mention—-Scott’s “real shocks are overrated” still holds—not quite a prediction in this instance——but once again a persuasive example of its likely truth—-and yes it does put the kabash on any doubts (were there any left?) that tight money was a dominant negative factor in 2008

  4. Gravatar of ssumner ssumner
    5. June 2020 at 10:05

    Michael, I still think they’ll fall short, but not as far short as I would have thought yesterday.

  5. Gravatar of Gene Frenkle Gene Frenkle
    5. June 2020 at 11:05

    The recovery from the Great Recession was slow because we had to unwind years of malinvestment from the 2001-2008 energy crisis in addition to many leaders in America, not unsurprisingly, believing fracking was too good to be true…along with the price of oil returning to $100. So here is Greenspan from 2003:

    “This natural gas crisis is hitting consumers hard. It will hit them harder this winter. It’s forcing industry to move manufacturing operations overseas, taking high-paying American jobs with them. It’s past time for us to pass comprehensive energy legislation that diversifies our energy supply and increases our energy production.”


    And here is Lee Raymond in December 2007:

    “This country is what I would call incipient on becoming a major gas importer and we’re going to go through a several year period here where we’re going to cycle between what appears to be we have almost enough indigenous resource to a period of time where if it were a very cold winter we would have to be importing large, large amounts. And that’s basically how you would expect it to transition to becoming a major importer.“


  6. Gravatar of David Pinto David Pinto
    5. June 2020 at 12:16

    Betty Boop was my favorite cartoon during my toddler years. I even name my dog Pudgie after her dog.

  7. Gravatar of ssumner ssumner
    5. June 2020 at 13:03

    Gene, No, energy did not cause the slow recovery, it was slow growth in NGDP that caused the slow recovery.

    David, It’s also my favorite cartoon.

  8. Gravatar of Gene Frenkle Gene Frenkle
    5. June 2020 at 13:25

    All I know is Greenspan was 100% correct about what would happen if we didn’t solve our natural gas supply issue and he didn’t even factor in the price of oil continuing to rise to $130 a barrel. Greenspan clearly states that high natural gas prices would force industry to move manufacturing overseas which is exactly what happened from 2001-2008…how could the American economy be fundamentally sound in that situation?? And then as late as December 2007 Lee Raymond has apparently zero faith that fracking will ever be economically viable.

  9. Gravatar of Rajat Rajat
    5. June 2020 at 15:11

    In Australia, people were debating the appropriateness of the ‘2 negative quarters of GDP growth’ definition of a recession – at least in how the term is used in the media and public debate – prior to the release of our first quarter GDP numbers. The idea was that first quarter GDP growth may have been positive and most believe the third quarter will be positive, so how could we end up with double-digit unemployment and no recession? Some proposed a wider shift to something like the NBER definition of recession. But I raised the question that if the period of contraction was really only 2 months – mid-March to mid-May – then it may not even satisfy the NBER definition, which refers to “a significant decline in economic activity spread across the economy, lasting more than a few months..”. Has the US had a recession, Scott?

  10. Gravatar of ssumner ssumner
    5. June 2020 at 15:42

    Gene, You said:

    “how could the American economy be fundamentally sound in that situation”

    Business cycles have nothing to do with whether an economy is fundamentally sound. You can operate at only 40% of efficiency and still have no recessions at all.

    Rajat, By my definition we’ve had a severe recession, but I don’t know what the NBER will decide. I’d guess they will rule it a recession. But you’re right, this decline has not lasted more than a few months.

  11. Gravatar of Gene Frenkle Gene Frenkle
    5. June 2020 at 16:03

    sumner, the over 3% GDP growth of 2004 and 2005 would seem to provide evidence that you are correct. However, I would ask you why was Greenspan sounding alarm bells in 2003 if all economic growth is equal? It would seem to me healthy economic growth in which Greenspan isn’t sounding alarm bells would beget somewhat sustainable economic growth whereas dysfunctional economic growth would end in a meltdown similar to 2008. If the economic growth ends in disaster then that would be evidence of malinvestment that should not be perpetuated. So I would argue the parable of the house built on sand applies to 2008 and in 2020 the economy was built on rock.

  12. Gravatar of Benjamin Cole Benjamin Cole
    5. June 2020 at 16:13

    Let us hope the Fed does not tighten up again too soon.

    This recovery had QE, in combination with stimulus checks mailed to individuals. A helicopter drop on Main Street? Also, all sorts of indecipherable Fed lending programs for businesses, some of which may be converted into grants. Did these programs play a role in the economic rebound?

    Side question: Scott Sumner once posited that the Hong Kong unrest had a lot do with a high housing cots in Hong Kong.

    So, the US just went through unrest, at the very time the nation had 40 million fresh unemployed (and also high housing costs across large swaths of the country). It has been Fed and national policy to keep domestic labor markets loose. Is that a factor in unrest?

    Did COVID-19 mass unemployment help trigger riots?

  13. Gravatar of Grant Grant
    5. June 2020 at 17:20

    The headlines seem to be that unemployment was expected to be higher in May than April? I’m not sure anyone who’s been paying attention to the various covid-related datasets (Apple’s, Google’s, OpenTable’s, etc.) would have believed that was ever possible. I don’t know how these estimates are made, but to me it looked like Trump set himself a really low bar so he could tweet this:


    Scott, I think you’re mistaking indices for the stock market. Yes the indices have done well, but the fate of individual stocks is much more varied. If you were to aggregate the market’s errors a year from now I think you’d find its missing the mark in many areas.

    The rally has largely been in tech names that can benefit from social distancing, with many of these stocks at all time highs. Tech aside, there are still many cheap stocks out there. Airlines look cheap, perhaps deceptively so. Casinos have oddly recovered, despite having older customers and being perfect environments for covid to spread. Shippers are in the toilet as if a difficult recession lies ahead of them.

    In short the market is mostly still pricing in significant disruptions from covid.

    There’s been a historic rise of retail (day) traders, fueled by stimulus, boredom, the work-from-home trend, and the mantra “stocks only go up” (https://twitter.com/stoolpresidente/status/1268542454086750208). Their assumption is the Fed will backstop any bad news or bear market, so the risk of recklessly longs are minimal.

    There are many examples of ridiculous excess here, but none more so than HTZ. The company recently entered chapter 11 bankruptcy. Its debt is trading for pennies on the dollar, and it went up 70% today. As far as I can tell this was not due to a short squeeze; retail has been buying it hand over fist (https://robintrack.net/symbol/HTZ).

    With only about 5% of Americans having been infected by covid, it’s not going away any time soon. New York aside, the U.S. was on “slow burn” to “second swell” path before mass gatherings (like the protests) started. Based on what we know of the virus, it needs large gatherings to spread quickly.

    We’ll see what happens, but it’s tough to see the virus not damping the economy until a vaccine is available. The good news is stopping large gatherings is probably enough to keep the spread manageable – no draconian lockdowns required.

  14. Gravatar of Nick S Nick S
    5. June 2020 at 18:14

    Sumner- don’t you think it’s too early to declare victory? You sound like a beginner millennial retail investor who’s made a few bucks buying Tesla call options on robinhood with his corona stimulus check.

    What metric is relevant here to measure the success of the latest round of helium from the Fed? Sounds like you’re advocating for stock market performance. That’s easy then, … Fed just continues to buy risk assets and boom! Problem solved? Even GDP is not a good measuring stick IMO, as its main driver as of late, has been the G, which of course is significantly financed by Fed money printing. See quote from Jeff Gundlach below.

    “ Last year, the national debt increased by over 6 percent of GDP. And nominal GDP growth was 5 or 5.1 percent. So all of the growth of the economy basically can be ascribed to debt. Another way to put it is if we hadn’t increased the national debt at all and just kept it the same, there would’ve been no economic growth. There would’ve been a negative sign. Which means there’s no organic growth in the economy.”

    Have a good weekend

  15. Gravatar of marcus nunes marcus nunes
    5. June 2020 at 18:52

    This is neither a real (supply) or demand shock, more likely a “sudden-stop shock”. Once the “draw bridge” is lifted and traffic can restart to flow, employment will rise. If it increases faster than participation in labor force (as was the case in May), u will fall. The longer term damage, I think, will depend on how the participation rate behaves. If (maybe due to disincentives) it is “discouraged”, the quality of the economic rebound will suffer.

  16. Gravatar of Akash Garg Akash Garg
    5. June 2020 at 19:44

    Solow growth model in action.

    I’m kidding, in case Poe’s Law applies, but there is something to the idea that people have been saving by eliminating all that is unnecessary and making do without, and now a bunch of upper middle class people, who retained their jobs, have somewhat more disposable income, and personal income for lower classes and others has gone up due to stimulus.

    I have always thought that whenever there is a liquidity shock, which this in part is, someone will be able to take advantage and design some product or service to increase liquidity. Companies, by and large, have done that. Alcohol turns into hand sanitizer. People make work from home work.

    And if the housing market does collapse due to late rents and worthless office space, well … hopefully we have learned enough lessons from 2008 that doesn’t happen.

  17. Gravatar of Postkey Postkey
    5. June 2020 at 23:26

    ” My favorite comments are from those who “blame” Powell for propping up markets.”

    He was following the ‘advice’ {amongst others?} of S. Keen?

    “Central Banks should buy shares directly to support share prices, rather than simply buying bonds under Quantitative Easing, to prevent a stock market collapse undermining both business and banks (Japan’s Central Bank is already doing this, though for other reasons). . . .
    Banks will also suffer badly. The asset side of their ledgers includes corporate shares: if these fall in value, banks will find their assets plunging, while their liabilities remain constant. A private non-financial company can continue to operate, so long as it can pay their debts as and when then fall due, so they can operate for a time with negative equity: their liabilities can be greater than their assets. But a bank cannot: it must have assets that exceed its liabilities, or it is bankrupt.
    A credit-driven, private sector monetary system is not capable of handling a systemic crisis like this.
    In fact, if the rules of such a system are enforced, it will make the crisis worse. Renters and mortgagors will be evicted, putting them on the streets, where they are more likely to catch and transmit the virus. Personal hygiene and public health will suffer, when one is needed to slow the pandemic, and the other must be functional to support its current victims. Stock markets will crash. Banks themselves will fail as their shareholdings plunge in value, bringing the payments system to an end. Even those unaffected by the crisis will be unable to shop.
    It is, on the other hand, possible for Central Banks and financial regulators, once authorised by their governments, to take actions that prevent the medical crisis from becoming a financial one.”


  18. Gravatar of Postkey Postkey
    5. June 2020 at 23:39

    ” . . . it was slow growth in NGDP that caused the slow recovery.”

    I presume you mean that there was an insufficient increase in aggregate demand? {monetary policy was too ‘tight’}?

  19. Gravatar of zby zby
    6. June 2020 at 01:16

    I subscribe to the bullshit jobs theory. Not the original conspiracy theory by Graeber – but a modification where it is a complexity byproduct. Maybe there wasn’t such a big supply shock, maybe working from home just pruned the bullshit a bit? You don’t need to pretend when nobody is watching.

  20. Gravatar of ssumner ssumner
    6. June 2020 at 07:39

    Grant and Nick, I agree that the economy still has big problems—that’s obvious. My point is that the stock market seems to have correctly sniffed out that things weren’t as bad as economists had assumed. The unemployment rate was expected to hit 19% in May. That’s a pretty big miss! But yes, the economy still has huge problems. We are not out of the woods.

    Nick, I don’t think you are familiar with my views on the Fed. I favor NGDP targeting, not buying risk assets to inflate asset prices. I’ve also frequently criticized our big budget deficits, so I’m with you on that issue.

    Marcus, I agree about the risk of disincentives.

    zby, If this isn’t a supply shock then what is? Huge industries like restaurants almost totally shut down.

  21. Gravatar of Postkey Postkey
    6. June 2020 at 07:43

    Or, maybe, not enough potatoes?

  22. Gravatar of Nick S Nick S
    6. June 2020 at 15:18

    Scott- Thanks for the response. Few things…

    1.) Correct, I’m not 100% up to speed on all of your views but trying to catch up!

    2.) You’re obviously in favor of NGDP targeting versus an inflation targeting strategy. However, isn’t NGDP targeting essentially a form of inflation targeting? The only difference being that the inflation target is dynamic instead of being static like it is now at 2%.

    3.) Hasn’t this concept already been thrown around by the fed as possibly targeting more “symmetrical” inflation (I.e. raising the target higher than 2% to be “symmetrical” to the sub-2% we’ve experienced post crisis?

    4.) You’ve stated correctly in an article of yours that monetary policy cannot boost RGDP in the long run, however, doesn’t the past decade of low inflation despite huge Fed QE programs concern you that the Fed cannot boost NGDP either? The low amount of inflation, in my view has been driven by the newly created Fed money being parked right back at the Fed by banks, not allowing it to multiply if it was lent out. Why was it not lent out? Perhaps, more stringent capital requirements, Sup leverage, HQLA, etc… but also, maybe because there were not many worthy creditors. Perhaps the only solution is to burn the thing down and have a good ole fashioned deleveraging and reallocation of capital!

  23. Gravatar of ssumner ssumner
    6. June 2020 at 19:06

    Nick, Why wasn’t it lent out? Start with the fact that the Fed paid them not to lend it out.

    The Fed always insisted it could raise inflation if it wanted to. When it began raising rates in 2015 the goal was to REDUCE inflation. So obviously they can create more inflation if they want to. When someone has their foot on the brake of a car, you don’t ask if the engine is unable to make the car go, you start by taking the foot off the brake.

    In addition, neither interest rates nor QE are a good measure of the stance of monetary policy. Rates often fall to zero after tight money produces deflation. High interest rates are often associated with easy money, even hyperinflationary monetary policy.

  24. Gravatar of Postkey Postkey
    7. June 2020 at 00:30

    ” . . . and never underestimate the amazing prescience of the stock market.”
    Amazing? Toss a coin?
    “History confirms that stocks make the wrong call on future recessions almost as often as they prove a bellwether. “

  25. Gravatar of Postkey Postkey
    7. June 2020 at 00:54

    “Gene, . . . it was slow growth in NGDP that caused the slow recovery.”

    S.B.S., is, of course assuming {like most economists?} that, during this period, there an amount of involuntary unemployment, that could be employed, if there was a sufficient increase in aggregate demand?

    According to T. Morgan most ‘conventional economists’ are ignoring the ‘supply side’ of the economy.
    “Starting with Japan back in 1997, and finally reaching Germany in 2018, the prosperity of the average Western person has hit a peak and turned downwards, not in a temporary way, but as part of a secular process which conventional economics cannot recognise, much less explain.
    This process is now spreading to the emerging market (EM) economies, most of which can expect to see prior growth in prosperity per person go into reverse within the next three years. The signs of deceleration are already becoming apparent in big EM countries such as China and India.
    Thus far, global average prosperity has been on a long plateau, with continuing progress in the EM economies largely offsetting deterioration in the West. Once decline starts in the EM group, though, the pace at which the average person Worldwide becomes poorer can be expected to accelerate.
    If deteriorating prosperity is the first point worthy of emphasis, the second is that a relentlessly increasing Energy Cost of Energy (ECoE) is the fundamental cause of this impoverishment process. ECoE reflects that fact that, within any given quantity of energy accessed for use, a proportion is always consumed in the access process.
    ECoE is a direct deduction from the aggregate quantity of energy available, which means that surplus (ex-ECoE) energy is the source of all economic activity other than the supply of energy itself.
    In other words, prosperity is a function of surplus energy.
    In the past, widening geographic reach, economies of scale and technological advance drove ECoEs downwards, to a low-point (of between 1% and 2%) in the immediate post-1945 decades. The subsequent rise in trend ECoEs has been driven by the fact that, with the benefits of reach and scale exhausted, depletion has now become the primary driver of ECoEs in the mature fossil fuels industries which continue to provide four-fifths of global energy supply. The role of technology has been re-cast as a process which can do no more than blunt the rate at which ECoEs are rising.
    By 2000, when World trend ECoE had reached 4.5%, Advanced Economies were already starting to face an insurmountable obstacle to further growth. Prosperity turned down in Japan from 1997 (when ECoE there was 4.4%), and has been declining in America since 2000 (4.5%).
    SEEDS studies demonstrate that prosperity in advanced Western countries turns down once ECoE enters a band between 3.5% and 5%. EM economies, by virtue of their lesser complexity, are less ECoE-sensitive, with prosperity going into reverse once ECoEs enter a range between 8% and 10%. Ominously, ECoE has now reached 8.2% in China, 10.0% in India and 8.1% in the EM countries as a group.
    The key point about rising ECoEs is that there is nothing we can do about it. This in turn means that global prosperity has entered de-growth. The idea that we can somehow “decouple” economic activity from the use of energy is utter wishful thinking – not surprisingly, because the economy, after all, is an energy system.”


  26. Gravatar of Postkey Postkey
    7. June 2020 at 01:39

    Since “The shocking casual police behavior resulting in the murder of George Floyd” was mentioned.

    “Mac Donald: Statistics Do Not Support The Claim Of ‘Systemic Police Racism’ . . .
    A solid body of evidence finds no structural bias in the criminal-justice system with regard to arrests, prosecution or sentencing, Mac Donald writes; rather, crime and suspect behavior, not race, determine most police actions.”

  27. Gravatar of Gene Frenkle Gene Frenkle
    7. June 2020 at 10:57

    Postkey, that is an interesting blog post. I will say going forward for the foreseeable future America’s energy problem has been solved. So even before fracking for oil was proven economically viable around 2012 fracking for natural gas meant that at worst America could have $75 barrel oil with investments that were actually being lined up as fracking for oil was being developed. So natural gas could have replaced oil to such a degree that high oil prices would no longer be a threat to undermine the economy.

    So with respect to 2001-2008 energy crisis the Greenspan and Raymond quotes bookend the economic climate Fortune 500 company CEOs were making decisions in from 2001-2008. So with respect to ECofE the American elite were witnessing increased energy costs along with Americans buying Ford Explorers (gas guzzlers) and plasma TVs (electricity guzzlers) while American natural gas production plateaued (even after Greenspan said it was a big problem) AND global oil production had plateaued while the price continued to rise. In addition to fracking we now have popular autos that run on electricity and consumer electronic devices are much more efficient with iPhones that barely use any electricity replacing desktop computers and plasma TVs and cable boxes that many people were still turning on once they got home from work in 2007.

  28. Gravatar of art andreassen art andreassen
    8. June 2020 at 20:16

    Scott: I have been banging on about the distortion caused by the Bureau of Labor Statistics PPI deflation process when it gooses up real dollar increases in shipments brought on by “quality increases”. It is not only shipments that are distorted but also the follow on calculations of productivity (increased) and inflation (decreased). It boggles my mind that economists care not in the least how these made up numbers impact their models. BLS calculates the the actual real dollar impact when it creates the deflator and could easily publish it. The BEA has made a similar calculation for decades for the dummy industry, Inventory Valuation Adjustment, to correct for a possible inflation discrepancy in the accounts and it is way more minor.

  29. Gravatar of Henry Slocum Henry Slocum
    8. June 2020 at 20:29

    It just seems like this is a focus on one variable (money) which is necessary but not sufficient for an economy to prosper. But we can increase the stock market’s value regardless. We’re all enjoying the ride.

    As for the others left behind, well….I guess we can always print government money for handouts and trinkets, right?? Is that the plan? I’m just not buying any insurance stocks…they might not be done burning buildings.

  30. Gravatar of DeservingPorcupine DeservingPorcupine
    9. June 2020 at 07:56

    The stock market didn’t exactly fail to anticipate the virus, I don’t think. The virus itself wasn’t going to hurt the economy much because, as we’ve seen, it doesn’t really kill the primary working population. It finally dropped because it incorporated the new information that countries were going to shut down in response.

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