The sucker’s rally on Wall Street is in full effect in large part because Wall Street’s powerful high-speed trading computers are completely mentally detached from the harsh realities breaking out on Main Street during the coronavirus pandemic.
So in short, consider fading last week’s rip in equities.
But oh what a rip higher it was, folks, as traders got their pounds of flesh from the Federal Reserve (unlimited QE program) and government (a $2 trillion-plus fiscal relief package). After finishing at its lowest level since 2016 on March 23, the S&P 500 exploded 9% on Tuesday. By the sound of Thursday’s closing bell, stocks staged their best three-day rally since 1933. Traders barely blinked an eye at Thursday’s otherwise insane 3.3 million increase in weekly jobless claims as coronavirus job furloughs began to ripple through the U.S. economy.
Despite the sharp selloff in stocks into the close on Friday, the consensus among the sources I talk to on the Street is that the bottom in the market may have arrived. Yes, bottom talk has crept higher in the matter of only three strong sessions for stocks. What bear market?
That’s even as so many strategists claim that coronavirus infection totals in the U.S. must show a peak before it’s safe to back up the truck on “cheap” risk assets. It’s amazing how investing discipline gets tossed in the trash when you see people making quick bucks in beat up coronavirus fear names such as Norwegian Cruise Line and Delta. Or, your portfolio manager friend one office building over is winning on a relative basis by riding long-time big-cap tech favorites Microsoft and Apple (which are outperforming once more).
But not every money mind is on board with that “bottom is in” call on stocks.
“You can call it a sucker’s rally, a relief rally,” said Frost Investment Advisors Tom Stringfellow on Yahoo Finance’s The First Trade.
“The majority of PMs (portfolio managers) believe last week’s rally will fade now that the U.S. stimulus package is law and deeply negative economic numbers are ahead. Until investors are confident peak Covid-19 cases are near and there is more clarity on when the economy will reopen, front month implied volatility will remain elevated, constraining valuations,” explained Evercore ISI strategist Dennis DeBusschere.
Consumers are under a lot of stress
I think it’s very important to listen to battle-tested veterans — aka current contrarians — such as Stringfellow and DeBusschere. So why go against the growing, incrementally bullish consensus on stocks right now? As Democratic strategist James Carville famously said, it’s the economy stupid. And when it comes to the coronavirus pandemic, the yawning number of bulls are forgetting the human toll — from financial to mental — on American households across the country.
It’s something that I was reminded of yet again (I pride myself on not being attached from reality) this past weekend while appearing on C-Span’s “Washington Journal.” The live show takes viewer calls from what sounded like to me the average Americans that drive the U.S. economy, not the billionaire suits that phone into boring traditional business TV networks to spew hot air (usually in support of their portfolios).
One caller told me they were just laid off from their job and are uncertain on their prospects to find another gig. You could tell the person was close to tears on the phone. I highly doubt this individual will be heading back to Starbucks when they reopen in a couple weeks. Another caller said they are a gig worker, giving massages to wealthy folks on Fifth Avenue in New York City. Their business has fallen off a cliff and aren’t sure how they will make ends meet. Looks like the wealthy have even re-trenched with their stock holdings going up in smoke.
A senior citizen who said they live in an assisted care facility griped about a recent increase in rent and asked if the fiscal stimulus plan had a bump in Social Security payouts.
I told her to call up the facility manager immediately and ask for rent relief — consumers are in a prime negotiating position to lower monthly bills given the acute contraction in economic activity.
I left the 45-minute show quite worried with how households are dealing with the coronavirus situation.
In turn, this makes me concerned about the medium-term path for stocks especially as Wall Street is trying to talk up the market. Warns Goldman Sachs strategist David Kostin, “Strategically, we continue to expect the S&P 500 will rise to 3000 by year-end 2020 as economic and earnings growth rebound from their 2Q trough. Tactically, we believe it is likely that the market will turn lower in coming weeks.”
The economy is going to put up some shockingly bad headline numbers in April and May, which will probably be the driver of lower stock prices. A few economists I have talked with suggest the April employment report could show way more than a million in headline job losses. Yes, you read that correctly — keep in mind the worst employment report during the Great Recession came in March 2009 with a decline of about 800,000 jobs.
Last week, Oxford Economics chief U.S. economist Greg Daco said on The First Trade the data in the weeks ahead will be catastrophic. He is dead right — and how could catastrophic data be priced into this market that has rallied hard off the lows? I see economic activity at a stand-still with my own two eyes — roads are empty by me almost around the clock. Easter baskets, stuffed bunnies and chocolate are piled high at Walmart and Target. There will only be an Easter this year from a technical standpoint. That’s lost economic creation.
President Trump said Sunday evening in a presser that the economy won’t start picking back up until June 1.
“Large parts of the economy are shutting down due to social distancing. Weakening will be reported in official statistics with the usual lags, but timely unofficial data continue to show precipitous declines,” reminds TD Securities chief U.S. macro strategist Jim O’ Sullivan.
The bottom line: U.S. households are under mind-boggling stress at present. Keep that in mind before you pull the trigger on buying stocks — the bottom will be in when households bottom, and that will only happen when infection tallies slow down and people can return to work.