Dow Jones Index Rises on Speculation as COVID-19 Cases Increase

Last week I indicated that the US market may fall but instead it rose with the Dow Jones Index up 3.25 percent, the S&P 500 up 4.02 percent while the NASDAQ Comp was up 4.62 percent. This is despite COVID-19 cases increasing in the United States. In another surprise move, the Shanghai Composite Index in China also rose strongly, gapping up in price last Friday to trade to its highest level since April 2019.

It seems that we are getting mixed signals around the world with markets not necessarily following economic fundamentals but rather rising on hope and irrational exuberance. In an interesting fact, we know that at the end of a stock market boom or bubble, it is retail investors and those new to the market that speculate pushing prices higher.

To understand where the economy stands, it often helps to look at the rate of bankruptcies and right now, we are seeing mixed data. According to the American Bankruptcy Institute, bankruptcies in the US rose 4 percent between April and May. The biggest growth in the number of bankruptcies was Vermont up 50 percent and Delaware up 34 percent, which is no surprise given the enormous number of companies that are registered in that jurisdiction.

Bankruptcies in Maine are up 28 percent, while South Dakota is up 26 percent and Massachusetts and the District of Columbia are up 25 percent and 24 percent respectively. The biggest declines in bankruptcies were in New Hampshire, which is down 22 percent, North Dakota down 15 percent, Mississippi down 14 percent and Alabama down 12 percent. It is interesting to see that bankruptcies in South Dakota are up 26 percent while they down 15 percent in North Dakota, which as I mentioned earlier is a sign that the data we are seeing is mixed.

With COVID-19 cases on the rise in many states, the question people are rightly asking is how long small businesses can survive if restrictions tighten. Last month everything started to open up with many businesses spending money by taking on new staff and readying themselves for things to get back to normal. Given this, many will have limited cash reserves and any further restrictions may force many to close their doors for good.

In another big surprise, there was good news in the employment numbers announced on Thursday last week. In May, 2.5 million jobs were created and it was expected that the June figures would be around the same level or slightly worse. Surprisingly, 4.8 million jobs were actually created.

Unemployment is now down to 11.1 percent, and many of you will remember only a couple of months ago, experts were predicting an unemployment rate of around 20 percent. While these figures are much better than expected, are they 100 percent accurate? Looking at the data, there is confusion around the classification of who is actually unemployed, who has temporarily stopped looking for a job and not being counted and who has a job and is not temporarily working as their employer is currently in shutdown or operating under restricted conditions.

On another note, Tesla had a stellar rise last week after it took off rising over 25 percent after investors speculated on the stock. Tesla is up over 130 percent since the end of March and is now, by market value, the biggest auto manufacturer in the world, yet strangely it does not make anywhere near the same number of vehicles as Toyota.

Tesla is seeing good sales of its Model S and Model X, and it seems there is increasing demand for its Model 3 in China. Tesla’s SUV, the Model Y, is also gaining traction in China as well as in other countries where the brand is sold. While sales are looking better, the question has to be asked whether Tesla is overvalued in 2020 and running on speculation or good sales. Personally, I think it is more of the former rather than the latter.

One issue is that Tesla has not proven it can consistently produce profits and Elon Musk is a bit of a wildcard who can do or say something that might affect the stock price. On top of that, Tesla has no COO at present and several of its key people have left in the past year, so this may slow down the growth of the company. For those who own Tesla right now, enjoy the ride into space while it lasts, but like all good space adventures, eventually it will come back to earth.
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