Why Are the Markets Rallying When the Economy is Terrible?

Sat. 05/30/2020

Over the past few weeks, markets have started to experience a bit of a rally in spite of such dire economic conditions. As parts of the U.S. begin a somewhat cautious and measured approach in order to restart the economy and attempt to get back to a sense of normalcy, the markets have rallied more so on what we believe is based on sentiment rather than positive economic indicators. We have been monitoring these economic indicators very closely since this whole crisis started and have been making adjustments to investment portfolios accordingly. While this rally has certainly helped calm some of the investing public’s nerves, we still see the volatility index (VIX) at high levels.

The analogy we can use to best describe this current environment is as follows:

A child comes home and presents to their parent their report card with a grade of B-. However, the parent looks at the report card with shock and surprise and thinks how is this possible? All the homework assignments and test scores during the semester show very poor grades with nothing but F’s and D’s. The basis for getting an B- just doesn’t make sense!

This is basically what we are seeing with the stock market’s performance. All the economic data doesn’t support the market’s rally. Support from the Federal Reserve ($3 trillion injection of cash into economy) and the Federal Government (stimulus checks), along with news that we are potentially closer to having a vaccine, is the “sentiment” markets have been rallying on. In our view, sentiment is not enough to support this market’s rally and history shows that when valuations are too high, markets tend to experience a downturn. As such, it is our view that the probability these markets retest the bottoms is still high. However, we also believe that a retesting of market bottoms won’t be as severe as we experienced in March 2020.

The road to an economic recovery will most likely be a long and bumpy one. It’s difficult to say how long it will take before 35+ million people who are out of work1 will be able to find a job. When a vaccine will be available for everyone to take. These are just some of the conditions that need to improve in order to support a more viable market recovery. However, it’s going to take quite some time before we get there.

Learn More –

We’d like to share with you a more in-depth look at these markets with data presented by Vern Montross and Sheldon Brandau from City National Rochdale. We have attached the presentation slides in PDF format for you to view here.

1. U.S. Dept. of Labor – Unemployment Insurance Data