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Like many market strategists, TPA has been puzzled as to how stocks are managing to maintain their rally, while unemployment stays high, the economy slips into a recession, businesses (public and private, large and small) continue to lose money, and Covid-19 new cases continue to climb. The first chart below shows how the U.S. has not managed the Pandemic nearly as well as the EU, yet it continues to outperform most other stock markets. The table that follows from shows how the S&P500 benchmark index is now trading at historical valuations. Finally, a chart of the percentage of non-earning companies in the Russell 2000 shows that we are at levels previously associated with real pain in stocks (

TPA believes that divergence between the state of things and the stock market can be explained by looking at the people who own stocks and the people who have been most affected by the current crisis. In 2018, the New York Times stated, “A whopping 84 percent of all stocks owned by Americans belong to the wealthiest 10 percent of households. And that includes everyone’s stakes in pension plans, 401(k)’s and individual retirement accounts, as well as trust funds, mutual funds and college savings programs like 529 plans.” Charting the U.S. stock market versus the U.S. economy over the long-term reveals that eventually the equity markets follow the economy, but in the short term stocks will not fall if the holder of stocks do not sell.

So, the question is “Why haven’t investors sold stocks?” The question can be answered by examing a recent STUDY by written about in Planet Money entitled “Rich People, Please Spend Your Money Again”. The article is based on a recent ground-breaking STUDY by economists led by Harvard’s Raj Chetty. The study shows that the poor have been disproportionately affected by the crisis since they work in service jobs, live in urban areas, and are less likely to work from home. On the other hand, the wealthy are more likely to work from home, live in less dense areas, and be less affected by Covid-19.

1. Covid-19 affected the poor and urban areas to a far greater extent than the rich and people in less dense areas. The poor experienced the lion share of the layoffs

2. The government’s rescue measures did not have a lasting positive effect on small businesses. Again, this hurts the poor.

3. Speeding up reopening also did not improve the economic conditions of the less wealthy.

· This recession has been driven by a decline in service where face-to-face contact is required and these spending declines were far greater in rich neighborhoods.

“First up, consumer spending. Typically, Chetty said, recessions are driven by a drop in spending on durable goods, like refrigerators, automobiles, and computers. This recession is different. It’s driven primarily by a decline in spending at restaurants, hotels, bars, and other service establishments that require in-person contact. We kinda already knew that. But what their data shows is this decline in spending is mostly in rich zip codes, whose businesses saw a 70% drop off in their revenue. That compares to a 30% drop in revenue for businesses in poorer zip codes.”

· The layoffs in rich neighborhoods has been far greater than the pain felt in poorer neighborhoods.

“Second, jobs. This 70% fall in revenue at businesses in rich zip codes led them to lay off nearly 70% of their employees. These are mostly low-wage workers. Businesses in poorer zip codes laid off about 30% of their employees. The bottom line, Chetty said in his presentation, is that “reductions in spending by the rich have led to loss in jobs mostly for low-income individuals working in affluent areas.”

· The government rescue effort did not improve the fortunes of small businesses.

“Third, the government rescue effort. They find it’s mostly failed. The $500 billion Payroll Protection Program, which has given forgivable loans to businesses with fewer than 500 employees, doesn’t appear to have done much to save jobs. When the researchers compare the employment trends of businesses with fewer than 500 employees to those with more, the smaller businesses eligible for PPP don’t see a relative boost after the program went into effect. It looks like the program didn’t do its job of saving jobs. Meanwhile, the stimulus checks, while increasing spending, did not have much stimulative effect because the spending mostly flowed to big companies like Amazon and Walmart. The money didn’t flow to the rich zip code, in-person service businesses most affected by the downturn. Overall, the federal rescue package, they find, has failed to rescue the businesses and jobs getting hammered most by the pandemic.”

· State ordered reopenings did not increase economic activity.

“Finally, there’s state-ordered reopenings: they don’t seem to boost the economy either. They compare, for example, Minnesota and Wisconsin. Minnesota ordered “reopening” weeks before Wisconsin, but if you look at spending patterns in both two states, Minnesota did not see any boost compared to Wisconsin after it reopened. “The fundamental reason that people seem to be spending less is not because of state-imposed restrictions,” Chetty said. “It’s because high-income folks are able to work remotely, are choosing to self isolate, and are being cautious given health concerns. And unless you fundamentally address that concern, I think there’s limited capacity to restart the economy.”

TPA provides and briefly discusses some of the charts from the STUDY below:

Spending on high ticket items like pools and landscaping has barely budged during the Pandemic, while industries like restaurants, airlines, and barber shops have been decimated.

Unemployment for low wage earners has been much worse than for the population as a whole.

Change in business revenue directly correlates to the wealth and the density of neighborhoods.

Lower-income people were far more likely to be forced to venture from their homes.

The spending changes for durables, non-durables, and services show a stark difference between 2008 and 2020. Although spending for durables and non-durables took a big hit in 2008, services have borne the brunt of the pain due to Covid-19.

The real pain of Covid-19 has so far been felt by average and poor citizens. On average, wealthier people, who are the owners of stocks, have been able to work from home and have continued to spend on things that did not require putting themselves at risk. Until the pain is felt by a broader and richer part of the population, the markets can continue to hang on; possibly ignoring the obvious fundamental issues.

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