The Roaring Twenties
The stock market seems resolutely determined to ignore coronavirus. It's not quite as high as the peak in prices before the virus broke out, but close.
Quite a few people have expressed concern to me about their investments. They're worried about the virus, and about social unrest in our country, and the prospects for growth and profit looking forward. Today, American Airlines announced that it would furlough 25,000 employees as of October 1, which is the date that federal aid expires. United Airlines made a similar announcement last week regarding 36,000 jobs. The people with whom I speak don't see how the stock market can ignore this. To be honest, I find it difficult to understand also.
You may recall that the stock market also ignored the Spanish Flu of 1918 - 1920. It went almost straight up during that period. I wrote about this earlier, and explained the rise away as a function of our victory in World War I and our return to a peacetime economy. But now I wonder. Maybe the stock market understands, as we individually do not, at least not yet, that Coronavirus is temporary. We will either find a vaccine or, like the last time, we will develop a herd immunity over the course of the next few years, possibly sooner rather than later. (Sweden and Arizona are already well on their way.)
If you impair corporate earnings only over two or three years, and use near-zero interest rates to discount future earnings, the present value of a company stock does not decline by too much. If you furthermore compute that earnings at Amazon, Microsoft, Salesforce and all the other tech firms will go up, representing an ever greater slice of the S&P 500, then stock prices begin to look a little more rational. Mind you, not a lot more rational, but a little. Maybe that's what's going on. We as individuals see doom and gloom, but the stock market understands the transitory nature of the epidemic and has discounted it appropriately.
After the Spanish Flu petered out, the Roaring Twenties commenced. The twenties roared due to very low-interest rates and a rash of invention. The car and the telephone, electrification, radio and cinema, all came onto the scene. But also, a mountain of pent up energy, from three years of social distancing, led to an explosion of social and artistic activity. We remember this era for jazz, and nightclubs and cabaret, and the Charleston. They were also years of Prohibition, but it didn't matter. In Berlin, and Paris, London, New York, and Chicago, people were ready to have fun in a major way, and they did.
The timing is coincidental, but I wonder if we are not at the cusp of another Roaring Twenties. We have very low-interest rates and plenty of invention. After lock-down, I know that I personally am ready to have fun, and I suspect that I am not alone in this. I don't know what the future holds in store, but I am prepared for something great.
The Roaring Twenties were not perfect. They improved life in cities but skipped the countryside entirely. They featured Al Capone and the Ku Klux Klan. And they culminated in the biggest stock market crash of them all. We should be careful not to let that happen again.
I don't know that these things will transpire. But I perceive that right now, doom and gloom is the prevailing wisdom. In the stock market, conventional wisdom is often wrong. Its assumptions are already reflected in current prices, but then something else happens. If I had to guess about a surprise, alternative ending, based on everything which I see around me, I would choose this.