A Bull vs a Bear

*In financial jargon, a “bull” believes the stock market will rise, while a “bear” believes the stock market will fall. Here’s an argument between them.  

Bull: Did you see the most recent jobs report? Nearly 7.5 million people got their jobs back over the last two months. Also, retail sales rose nearly 18% in June. The recovery is officially here!

Bear: It’s no surprise that a chunk of the economy came back quickly. But, the low hanging fruit always gets picked first. Picking the whole tree will be much harder. Yet, the stock market is acting like we’ve already picked it, packaged it, and sent it off to the grocery store.

Bull: The stock market is a forward-looking beast. The moment there’s a widely available vaccine, we can get back to normal. Even if “normal” is two years away, the end is in sight. So, why not be invested in stocks?

Bear: Yes, the stock market is looking ahead, but the future is hard to predict – and the stock market isn’t always right. We are far from “normal,” and I don’t think we’re getting back there anytime soon. If this recovery stopped right now, this would be the second worst recession of all time (after the Great Depression). If we can claw back to 90% of our previous economic glory by the end of the year, that might sound like a victory. But, that implies a 10% recession, which would be the 2^nd worst of all time. As a comparison, during the Financial Crisis in 2008, the economy only fell 4.3%. So, we have a deep hole to dig ourselves out of.

Bull: But we are already digging, and the stock market can see that. In addition, trillions of dollars were tossed at this problem, and trillions more may come. Also, gas prices are low, interest rates are low, and there’s pent-up demand from the millions of people who’ve been stuck in their homes eagerly waiting to go buy stuff. Once we move beyond the virus, the economy is set to explode.

Bear: Yes, there’s historical levels of money floating around the economy. But, how long can that last? Oktoberfest was just cancelled in Leavenworth. That’s still 3 months away! I fear our weak economy may last much longer than the government’s willingness (or ability) to cut huge checks.

More importantly, printing money and going into debt isn’t “real.” True economic growth is built on consumers spending and businesses investing. But, who’s going to spend and invest aggressively after taking a big economic punch, and when things could be shut down again at any moment?

Bull: Let’s assume you’re right, and we suffer a major recession and a long, slow recovery. Can’t the stock market continue to grow? Remember, the stock market isn’t exactly the same thing as the economy. The stock market is made up of the biggest companies in the world; companies that can actually benefit from the little guys getting crushed. In other words, as smaller businesses fail because of a bad economy, the Amazon’s, Chipotles, and Home Depots of the world survive and take a bigger piece of the pie, even if the pie is smaller.

Bear: If the little guy is getting crushed, eventually, it will “trickle up.” Consumers make up 2/3rds of the US economy. If consumers aren’t consuming, how profitable can even the biggest businesses be?

Bull: Well, the companies in the S&P 500 earn half their revenues from outside America. While Americans are the “best” consumers, 95% of the world’s consumers live outside America. So, even if the American economy is weak, stocks can be strong.

Bear: If the US economy falters, the world economy will follow. As the saying goes, when America sneezes, the world gets sick. At least for the moment, the stock market can celebrate in the face of a weak economy – but it can’t last forever. Oh, by the way, the Phase One trade deal with China is effectively dead, and there is an election in a few months.

Bull: Okay, I’m convinced. Sell everything.