FREE ACCESS April 20, 2020

MorningWord 4-20-20! The SPX Rally Up in Smoke? Left with just Seeds & Stems

by Dan

Over the weekend there were a few stories that caught my eye reinforcing my belief that the stock market’s 30% rally from the March 23rd low does not confirm the economic realities that exist for the underlying components and the global economy in general based on what is likely to be continued disruptions from the Coronavirus Pandemic.

First, from Axios, the sheer size of the relief and stabilization funds to plug the massive hole left in the economy from the mitigation attempts – America’s future foretold:

Consider these projections, just three months into the crisis — with untold months of twists and pain ahead:

  • Between Congress and the Federal Reserve, the U.S. government has already committed more than $6 trillion “to try to stop an economic calamity — with just limited success,” the Washington Post reports.
  • And that total is already rising: The White House and Congress are close to agreeing on an aid package of as much as $500 billion.
  • Even before the virus crisis, the U.S. was on track for a once-unthinkable $1 trillion budget deficit. Now, Morgan Stanley and Goldman Sachs both estimate that could be $4 trillion — the most, relative to the size of the economy, since World War II.

Business borrowing also is setting records: Companies including ExxonMobil and Walgreens, “which binged on debt over the past decade, now are exhausting their credit lines and tapping bondholders for even more cash,” the WashPost points out.

  • Wall Street banks warn the pandemic could cost the global economy more than $5 trillion of growth over the next two years, which is “like losing Japan,” as Bloomberg put it.

  • States and cities are losing tax money, producing an additional, closer-to-home disaster, as Axios’ Stef Kight and Dan Primack reported.

The WSJ highlighting the newfound optimism from Wall Street strategists as it relates to recovery in the stock market, and the economy: The Stock Market Is Ignoring the Economy

“While it’s great to be in the green, we do wonder, what is it that the markets are celebrating,” said Amy Kong, chief investment officer at Barrett Asset Management. “Nobody knows how long this is going to last,” she said of the pandemic.

Many analysts are now betting on a so-called V-shaped recovery—a sharp slowdown and then a quick economic recovery. Goldman Sachs Group Inc. economists expect the economy to significantly contract in the first and second quarters before rebounding later in the year.

Analysts are also looking past this year’s abysmal earnings expectations and forecasting profit growth in the first and second quarters of next year, FactSet data show. Corporate earnings are projected to plunge by 27% in the second quarter of 2020, before rebounding.

Marko Kolanovic, JPMorgan Chase & Co’s global head of quantitative and derivatives strategy, has been analyzing reams of data on the spread of the pandemic around the globe, looking at hospitalization rates and resources like hospital beds for clients. He expects U.S. stocks to be back at highs in the first half of next year. Why? Going against the Federal Reserve is typically a losing battle, he said.

And if you were concerned about the S&P 500’s (SPX) valuation in the lead up to the prior highs in February when the stock market was not the least bit bothered by the gathering storm of the coronavirus globally, the recent hit to corporate earnings, and the subsequent bounce in the stock market has left its forward P/E at nearly the same spot as it was in Feb:

As I said on Friday, like most, I am hopeful that we are making progress on testing, treatments, antibodies, and vaccines. Sadly, the economy, schools and other critical parts of our lives will need to come out of lockdown before we have confidence that our leaders have their arms around the first wave of this health crisis. As it relates to the stock market, it just be the absolute wrong lens to gauge the state of the health crisis and the health of our economy. The focus on the stock market by the White House in Janaury and February might be one of the major reasons why we are where we are today, shackled with fear of the spread due to the horrid mismanagement of preparation for the eventual spread. The insistence on suggesting the virus was contained and would not have the health and economic impact here as it did in China, or parts of Europe led us to be ill-equipped to handle the pressure on our healthcare system and the economy.

So I’ll reiterate my comment last week on Twitter:

 

 

 

 

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