Even with the highest unemployment rate in more than 80 years, the U.S. Stock Market continues higher regardless of the lousy economic data and fundamentals. However, without the massive money printing and liquidity injections by the Federal Reserve, the stock market indexes would be substantially lower.
Unfortunately, the Fed is now forced to prop up the markets because stock markets have now become the economy, instead of the other way around. With the total U.S. Equity Market Cap to GDP Ratio now nearly 140%, it is more than double the 68% mean average for the past 70 years. And, if we look at the markets back in the 1950s, it took 24 years for the Dow Jones Index to double from 500 to 1,000.
Thus, from 1958 to 1982, the Dow Jones Index traded in that 500-1,000 range. So, the real driver of the economy before the 1990s was the “Physical economy,” not the stock market. Well, that’s all changed today because the Stock Market is now the most important part of the economy. Interestingly, it only took seven years for the Dow Jones Index to double from the 14,000’s to 29,500 (Oct 2019).
Even though the Fed has propped up the markets, it won’t last because GRAVITY and FUNDAMENTALS always win out in the end. One metric that has provided a “Reliable Indicator” for Major Corrections in the Dow Jones Index is the Unemployment rate.
THE CHART OF THE WEEK shows that when the U.S. Unemployment rate went above 9%, the Dow Jones Index fell to the 100 Quarterly Moving Average. Yes, that’s correct… I stated QUARTERLY. I decided to upgrade my Stockcharts service to include longer-term charts and more interesting settings. So, now I can use the Quarterly setting, which represents three months of trading.
When the U.S. Unemployment rate went above 9%, we can clearly see that the Dow Jones Index fell to the BLUE LINE, which represents the 100 Quarterly Moving Average (QMA). If we look at the current unemployment rate of 14.7% for April, the Dow Jones Index is nowhere near the 100 QMA of 13,150. You can thank the Federal Reserve for keeping most Americans from liquidating their 401K’s and retirement plans.
I can assure you if the Dow Jones Index continued to fall below the 18,000 level, the GREAT AMERICAN PANIC SELL-OFF would have gone into OVERDRIVE. I will do a new video update showing why the 18,000 level was significant. So, if Americans really started to sell their stocks, it would have created a NASTY FEEDBACK LOOP instigating even more selling. Again, you can thank the Fed and for keeping Americans happy, content, and delusional in regards to their 401K’s and retirement plans.
With the U.S. Unemployment rate likely to reach 18%-20% by May-June, I don’t see how the Dow Jones Index doesn’t fall to the 13,150 level, or even lower.
At some point, the RUBBER will meet the ROAD as the fundamentals finally kick in… regardless of the money printing. This is when I believe we will start to see demand for GOLD & SILVER like we have never witnessed before. Sure, there’s been a great deal of physical buying from precious metals investors, but most Americans are still FAST ASLEEP looking forward to their next cruise on the Diamond Princess.
The world is heading towards a new Economic Paradigm. A transition from BUILDING WEALTH to PROTECTING WEALTH. This is due to the current ENERGY CLIFF that the U.S. and the global economy has finally reached.