To understand why stocks have rallied despite economic catastrophe, I delved last night into one of my favorite financial books. I came across this illuminating quote, which I want to share with you:

“The problem is, the money investors take out of the system is coming from other investors who are putting money into the system, and the stock market is just a system that shuffles cash between investors. It is a system where current investors’ profits are strictly dependent on the inflow of money from new investors. And, such a system is also known as a ‘Ponzi scheme.’ ”

The quote comes from The Ponzi Factor: The Simple Truth About Investment Profits (2018), written by economist Tan Liu. Do those words describe the rally since late March?

Exuberant investors, driven by the Fear of Missing Out (FOMO), have been piling into equities. The three main U.S. stock market indices closed higher Thursday for the fifth straight day. The Dow Jones Industrial Average rose 0.68% and the S&P 500 climbed 0.64%. The tech-heavy NASDAQ jumped 1.00%, to close at a record high of 11.108.07.

All three main indices were trading in the red Friday afternoon, despite an ostensibly positive jobs report earlier in the day. The Labor Department reported this morning that U.S. employers added 1.76 million jobs in July, versus 1.48 million expected. The unemployment rate fell to 10.2%, down from its 14.7% peak in April. It’s important to note, though, that for the most part these aren’t new jobs. Nearly all of the people returning to work were on temporary layoffs.

Investors are nervously eyeing fractious deliberations in Washington over new fiscal stimulus. Wall Street also is spooked by renewed Sino-American trade tensions. President Trump on Thursday signed executive orders that ban transactions with the parent companies of Chinese social media firms TikTok and Tencent (OTC: TCEHY).

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Ponzi schemes collapse when it becomes difficult to attract new investors or when a significant number of investors ask to cash out. It remains my contention that a lot of investors are about to flee the market, causing the pyramid of cards to come tumbling down. It’s difficult to come to any other conclusion, when severe recession, high unemployment, negative corporate earnings growth, political paralysis, and a raging pandemic are all taken into account.

The Federal Reserve’s monetary stimulus and second-quarter corporate earnings beats have provided a tailwind for equities. Chatter about a COVID-19 vaccine also is making investors upbeat, although as I’ve continually warned readers, vaccine hopes represent magical thinking (as well as political desperation).

Weekly initial jobless claims yesterday came in better than expected. The Labor Department reported Thursday that new filings for unemployment benefits last week totaled 1.186 million, the lowest level of the coronavirus outbreak. The consensus had expected more than 1.4 million.

Nonetheless, for 20 consecutive weeks, the number of Americans who have lost their jobs and filed for unemployment insurance has exceeded 1 million. Here’s the ugly truth: For millions of Americans, the jobs they lost are never coming back.

The ideological divide…

Democrats and Republicans remain far apart on negotiations for a new coronavirus relief bill. Democrats want generously extended unemployment benefits; most Republicans say no. The GOP also insists on certain advantages for business that Democrats reject, such as protection from lawsuits filed by virus-stricken workers.

Unless Congress achieves consensus on a new bill, President Trump has threatened to step in with unilateral executive actions, such as suspending the payroll tax. Democrats are united in vehement opposition to the idea and see it as a backdoor attempt to gut Social Security, because the retirement program depends on the payroll tax for funding.

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In March, Congress passed the CARES Act, a $2 trillion stimulus package designed to keep individuals and businesses afloat with loans and payments. The goal was to buy the nation time to contain the virus, through social distancing and lockdowns. Once the curve was “flattened,” businesses could reopen.

It just didn’t work out that way. Now, the coronavirus is resurgent, fiscal stimulus has largely expired, and the clock is ticking for Congress to act before the August recess. Lawmakers on the left and right of the political spectrum have dug in their heels.

Congress missed a deadline last week to extend the $600 per week in enhanced unemployment payments. The federal government’s Payment Protection Program, which has pumped $523 billion into the economy, expires tomorrow. GOP leaders said this week that if an agreement isn’t struck by today, they’ll walk away from the table.

Those who engage in happy talk about how the pandemic in the U.S. is under control are delusional at best or lying at worst. Or perhaps they’ve reached the “believing-their-own-lies” stage.

Ignore the spinmeisters; heed the scientists. Nearly 300,000 Americans are likely to be dead from COVID-19 by December 1, University of Washington health experts forecast on Thursday.

Since the first cases of COVID-19 were detected in China in December, the U.S. has become the worst-affected country, with more than 4.8 million diagnosed cases and more than 160,000 deaths, although some experts say the death toll is probably under-counted.

And yet, Congress is on the verge of leaving town for its August recess without forging a stimulus deal.

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Of course, as the recent rally has shown, the stock market is forward looking. Stocks have been rising because investors are looking toward early 2021, when the consensus forecast is for economic growth to resume.

What’s more, the major equity indices are heavily weighted toward global giants, which are surviving the pandemic better than small businesses. Big Tech has greatly benefited from rising demand for digital goods and services, hence the NASDAQ’s lofty heights.

The picture should indeed brighten next year, but the trick is getting from here to there intact. Sometime before the end of 2020, we may see the Ponzi factor come into effect.

A winning hand…

Make no mistake: I strongly urge you to stay invested. The good news is, there’s an asset class with a history of surviving market panics. And in the second quarter, it’s the leader in year-over-year earnings growth.

The blended (combines actual results for S&P 500 companies that have reported and estimated results for companies that have yet to report) earnings decline for the second quarter is -35.7%, according to research firm FactSet.

As the following chart shows, the utilities sector leads the pack in profitability:

Utilities provide essential services, a virtue that tends to make their stocks recession-resistant. During this pandemic-induced economic contraction, people still need electricity. Paying the power bill always remains a top priority for any household.

U.S.-based utilities also are insulated from geopolitical tensions. Trump’s executive orders on Thursday are a reminder that the trade war persists between the world’s two largest economies.

The appeal of dividend-paying utilities stocks is based on fundamentals. If a company has the low debt and healthy cash flow required to throw off juicy dividends, it follows that the balance sheet is intrinsically sound enough to sustain the firm through corrections, economic downturns and even deadly pandemics.

For the best utilities stocks to buy now, follow this link. These companies are cash cows that generate robust double-digit yields, year in and year out. They’re strong cards to play.

Questions or comments? Drop me a line: mailbag@investingdaily.com

John Persinos is the editorial director of Investing Daily. He also edits the premium trading service, Utility Forecaster.