It seems like there's an increasingly clear divergence between our economic reality and stock market valuations. As more and more data points to a delayed US reopening and prolonged economic recovery, why are the markets continuing to rally? It seems like a quick reopening and V-shaped recovery is priced in, but I don't think it has strong support. I'm bearish and expecting a strong pullback in US equities - would love to hear other feedback / positions / stances on this.
The S&P is only -16.5% from pre-Covid highs... does this make any sense at all after what will likely be a >2 month shut down?
What's driving the rally? Do investors truly believe in current valuations or is this the result of momentum trading, algo trading, etc
Where is the smart money right now?
following
I am with you and have commented on this issue in another topic. Earnings suck, unemployment is getting much higher, certain industries/companies are in peril, consumers are not spending, the real estate market is weakening, the oil market has imploded but yet large cap stocks are only down about 15% from their highs. Small cap stocks are down much more, though.
The government came to the rescue via both expansionary monetary and fiscal policy. The monetary expansion side of it makes little sense to me, especially regarding dropping the fed funds target to 0. We did not have a rate problem, as money is already cheap. I kind of get the Fed buying some debt but we do not have a credit crisis. I can't disagree with the fiscal expansion, especially regarding unemployment benefits and the government probably had no choice but to bail out " too important to fail" industries.
What is driving the market higher? You said it, the expectation of a V shaped recovery. We have been accustomed to experiencing these type for bounce backs. According to some investors, the bad news is already "priced in." My crystal is just as foggy as that of the next guy. I have no idea where the market is headed but what I do know is that economic conditions are terrible.
This article is reasonable: https://seekingalpha.com/article/4339418-bear-is-on-prowl
I read the first part of it and agree with the sentiment but then the author goes into all this technical analysis, which has very little support academically.
I'm not sure, it seems like a lot of people think we're out of this thing already. I think we've got a bad earnings season coming up and some bad unemployment numbers that will take a while to fix.
From a fundamentals approach, all the drivers are terrible. If the fair value of a company is it's future cashflows discounted to today.........where are the cash flows when everything is shutdown? It's widely stated that the bad news is priced in, however to me it appears that the market is not pricing in the steep decline of profits that will be reported for Q2, Q3, Q4 2020 & FY2020
In other news, China just put another 10mln people on lockdown over virus fears.
Markets can remain irrational longer than you can remain solvent. With that being said, I thought the S&P500 was a buy when it dipped close to 2300/2400. I think we're headed for another major drop. How much money can we possibly print at the end of the day? Going with BAML on this one, buy gold because the fed can't print gold
I think the base case is "things get worse," but people are loathe to give up a quick bounceback to ~Feb prices if a quicker solution is found (or disease isn't as bad as people think, idea starting to percolate in articles like the below), so current trading is kind of probability-weighted average.
https://www.bloomberg.com/news/articles/2020-04-23/new-york-finds-virus…
I am astonished by how people think, really. You shutdown the whole economy and you expect good news? no surprise in unemployment increasing and earnings goin down.
Do you know how much chinese stock market fell in Q1? -10%. How much did Europe/US stock market fell? 30% for the same reason. Chinese infrareaction or over reaction in the other markets? Well, after almost two months of lockdown China is recovering at an incredible pace, just look at the PMIs (private and public) its the clearest V youll see.
It is important not to confuse a crisis generated by an external factor (real estate bubble etc) with an internal one (government caused). Why? well, one recovers quicker than the other. Do you think people will cease to travel? to meet friends in restaurants, clubs etc? in telling you, NO.
What to do? if you don’t need the money in the short term, invest all of it in stocks like airbus, ryanair, carnival, melia etc they will certainly rebound, they are market leaders and have solid balance sheets. You can also take a look at high yield which is moderately attractive and might yield returns sooner than the stock market.
No one expects good news.
How do you know how long it will take for this economy to recover? Have you ever lived through a pandemic of this magnitude?
Here is what some people are not going to do for at least the next 6 to 12 months 1. go on a plane 2. take a train 3. go to a sporting event 4. go to a concert 5. go to the movies 5. go to a bar 6. spend lots of money because he or she is worried about their jobs.
7. buy a house 8. buy a car
The above all assumes that we do not get a second wave of the virus. I think you are greatly underestimating how long it it will take for the economy to recover.
The fed printed trillions. Those dollars will be pumped back into equities over time.
this happens in every bear market, you get initial bad news, first leg down, then the thought of an overreaction, a relief rally, and then if it doesn't turn into a 1987 or 1962 type market, you get the next leg down as the market prices in a slow recovery or more bad news rears its ugly head. brief synopses of the past 2 big ones to help put this into context
tech bubble
late 1999/early 2000 - market was on fire, but spending was volatile, AOL merger closed, and then greenspan announced he was raising rates aggressively (remember, the Fed used to want to cool the economy down when it ran too hot), this marked the beginning of the end. Microsoft lost an antitrust case, S&P fell 9% for the year.
2001 - 9/11 terrorist attacks, market shut down for 2 weeks, then Enron bankruptcy the next month. S&P down 11.9%, after a bit of a relief rally post-9/11. you may remember him as a nincompoop, but people were more in love with George W Bush in Q4 2001 than any President I can remember (Reagan was great, but I was a kid and so memory is foggy).
2002 - relief rally over, more bad news (worldcom, arthur anderson, pets.com). markets zig zagged over the summer before finding a bottom in the fall. if you look at some of the performance for summer 2002, you'll see that it's impossible to get the timing of these things right. for long-only investors like myself or for your personal accounts, this is why I advocate for dollar cost averaging, or just buying at good valuations and holding. you'll get clobbered, but long term you'll be right. markets fell 22% in 2002
financial crisis
2008 - early in the year, jim cramer said bear stearns is a buy (I'll never let you forget this, Jimbo), promptly got sold to jamie dimon for $5 and a baby crocodile. markets were down maybe 20% or so at this point, and the Fed was talking this down as isolated, not really taking it seriously. markets rallied a little bit into the summer, but the bad news started creeping in, and then the big one - Lehman. when lehman went belly up, all hell broke loose, MS and goldman became bank holding companies, WaMu went bankrupt, AIG got nationalized, money market funds broke the buck, a lot of us where I sit were still making money, incomes were down but the biggest worry was whether you would wake up one day and your employer would be bankrupt. management teams were saying there was no junk on the balance sheet at the same time they were aggressively selling their shares. about 3 months after Lehman went bankrupt, buffett came out with one of his boldest calls ever, writing about why everyone needs to back up the truck on US stocks. markets rallied at the end of the year and a little into January 2009, this was when the bailouts were passed for auto companies, rates went to zero, and people breathed a little relief thinking if Buffett and the Fed are doing whatever it takes, maybe the worst is over. then for reasons I still can't fully grasp, markets fell further before finally bottoming in March 2009
this one will be different in many ways but similar in a lot of ways. we've seen the initial leg down (albeit faster than prior ones) and a bear market rally. only time will tell if March 23rd was the bottom, whether we get a re-test, or whether we see another 2008 type market where the relief rally is to lull you to sleep before you get punched in the mouth again. you can't trade these things, so best to step aside when you're in the middle, do some nibbling when you see good valuations (they're out there!) and then back up the truck when the carnage is greatest. you will most likely lose money at some point trading a bear market. either you'll buy too early or you'll miss the bottom, initially thinking you bought too late, but markets don't go up in a straight line post-crisis, they creep back up, so just be buying, but also don't look for instant gratification on your trade.
TLDR - time will tell if the rally was rational. based on market history and this bro's opinion, too early to say the carnage is over. ask me again in 2 years. even if March 23rd was the bottom, we won't know that for a while
Nihil non totam distinctio voluptatibus atque qui ut. Magnam ut aut id consectetur modi deserunt recusandae unde. Expedita neque maiores nostrum sit quia omnis necessitatibus. Laudantium sint dicta fugiat molestias ratione dicta minus.
Amet rem unde maiores quos tempore dolor omnis. Aut earum reprehenderit veniam et et non in. Voluptas repudiandae ratione rem et provident nemo vel consequatur. Praesentium occaecati tempore eaque sint enim.
Earum eligendi et nemo excepturi eligendi. Sapiente dolor dicta quia officia sunt. Fuga unde aut labore. Nisi sit aliquid cumque aut eveniet quia aperiam. Quod aliquam ea assumenda.
Tenetur et nesciunt nesciunt vero delectus aliquid consectetur est. Minima unde ducimus itaque sunt dolores dignissimos aut. Saepe quo eaque numquam dicta est quia repellendus. Quasi dolorum ea cum velit hic. Quos corrupti sequi ex quis sequi. Eius ad sed ut distinctio illum.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...