American’s rioted in the streets in a manner not seen in decades over the death of George Floyd at the hands of police in Minneapolis, but that didn’t stop equity markets, which continued an incredible run, up 5.3% in the US and 7.2% outside the US. The disconnect is startling. Jeremy Grantham of GMO wrote in his latest quarterly letter that the market valuation, as measured in terms of p/e, is in the top 10% in history, while the economy, is in the bottom 10%, and probably worse than that. However, on the other hand, Wharton Professor Jeremy Siegel, has said that if you do a discounted cash flow analysis and assume a 30% drop in earnings this year, followed by a return to normalcy, you would get a price cut of only 4% or so. That is slightly better than the overall US market as measured by the VTI which is down just 5.5% from the February 19 high.
As crazy as it seems that the market would rally with cities burning, it is not without precedent. The week after Martin Luther King’s death in 1968, stocks were up by 2.9% and were up 5.1% one-month after. Stocks were up 1.2% after LA police officers were found not guilty of assault against Rodney King. Liz Ann Sonders, chief investment strategist at Charles Schwab says that “…if you look back at large-scale civil unrest… the market tended to sort of look through that.”
The week was already positive but ramped higher on a surprisingly strong jobs report. The consensus was for a loss of 7.5 million jobs, but employers added 2.5 million jobs. The jobless rate fell to 13.3%, still a terrible number but down from 14.7%. The jobless rate is still 4x higher than in February, and some of the hires might be due to the PPP program. But the market took the report as a signal that the economy can come back to life sooner than feared and that a V-shaped recovery can happen.