The Economic Crash: What Wall Street Doesn’t Know Will Hurt Us
Today, we received news that the American economy recently fell harder and faster than it ever had before. The GDP fell 9.5% in the second quarter from the same quarter last year, which makes a 32.9% annual contraction rate. That’s not a recession or a depression. That’s a catastrophe.
Wall Street was down on the information, with the DJIA losing over 300 points before regaining some losses and the S&P seeing a similar reaction. Oil fell with WTI crossing below the $40 threshold again. Gold fell too, down almost 1% at one point. In other words, this catastrophe was news to Wall Street, but it was not extremely important news.
Those of us in the real world knew this was coming. We saw the local pizza shop close in March, try to stay open with take-out dining and then set up makeshift outdoor seating on the sidewalk. We went to our local drycleaner who opened during lockdowns for a few hours at a time hoping the authorities wouldn’t notice, even though they had so little business while no one was going to the office. We spoke to our family and friends who struggled with their irrigation business or their house painting business. We knew even doctors who were furloughed and accountants who were facing the loss of clients as those clients’ businesses went under. We saw the real estate signs up and realized how much the landlords were struggling—and how much they will continue to struggle.
We are accustomed to economic downturns going from the top down, and it seems that many analysts are unable to realize that it can go the other way too. The Great Depression started in 1929 when the stock market crashed. The Great Recession in 2008 was caused by bad mortgages and the failure of complicated financial instruments. Even back in 1893, a recession resulted from a stock market panic that was caused by the failure of a single firm that made rope, the National Cordage Company.
Now, however, we have the decimation of small businesses and leisure industries first. This isn’t the collapse of Lehman Brothers bank. It’s the collapse of Lewis Brothers sandwich shop. And that hurts too, but does Wall Street know that it hurts? The market fell today amid the bad news, but it didn’t collapse. It’s as if Wall Street saw the information, processed it and shrugged.
Meanwhile, in the oil world—because this is a column about energy—the price rose from unbelievable lows as the economic pain was probably at its worst. Yes, WTI went negative for a brief moment in April, but that was a quirk of expiring contracts. Even if you negate that event, the value of WTI has more than doubled in the last few months. So many analysts said oil demand was returning and would rebound fantastically. This was first based on the quick jump in consumption when the lockdowns started to end, but of course there would be an increase when consumption had been almost nothing for two months. Then, analysts relied on Apple Mobility data to say that Americans were driving and traveling again, but that data turned out to be wrong.
It seemed very few analysts wanted to admit what was right in front of all of us. Americans are not driving or flying like we did before, and it may be a long while before we do. Many people are still not driving to work every day. Few people are flying for business or leisure. Just go to any of the travel websites and look for flights—you’ll get a bargain. The summer vacation has been crushed. If Americans are not staying home because of various states’ quarantine rules, they are staying home because they are either too nervous to travel amid the virus or they are nervous about money.
This economy is bad. It is not on the verge of recovery, but Wall Street has recovered. The S&P 500 is within 5% of its peak and the DJIA has risen about 40% in four months. Yes, Amazon AMZN , Walmart WMT and Proctor & Gamble PG have done very well amidst this devastation, but the economy is in terrible trouble.
Maybe the divide in perception lies between those who have already experienced the pain and those who haven’t. Service workers have suffered the most, it seems. Government workers generally keep their jobs even if they are still at home every day. Some doctors and nurses and hospital staff have been furloughed and laid off, but people in finance are still working even if they are doing so from outside of the city. Small business owners have suffered, but teachers get their paychecks.
Yet, this might all change. As small businesses close or save pennies, they stop hiring lawyers and accountants. As workers bring home less money (or only unemployment) they spend less. Americans will be left with There will be left with thousands of lost small businesses and all of the damage that does to the people and families involved.
Even if your job is secure and your family is fine, you should have known about this catastrophe. Today’s news should have been expected. If you just walked down Main Street with open eyes these last five months or talked to your brother-in-law or your best friend from high school, you would have known. If you are lucky, have empathy and compassion.
And, when it comes to the markets, remember that what Wall Street doesn’t know will hurt us.