Ayman Nadir
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This rally has happened in a bubble where the economy had to be shut down, but the Federal Reserve and the federal government provided an unprecedented backstop. As state governments attempt to reopen and the limitations of that backstop are evident, a lot of valuations will be called into question.
Investors will always be reluctant to fight the Fed, especially one providing historically large liquidity and with a fed funds rate tilting to negative for the first time. But the unprecedented action isn’t creating unprecedented enthusiasm.
“While hedge funds have responded to lower prices by their equity exposure from the lows of late last year, they have gone back only to a neutral allocation,” Andrea Cicione, Head of Strategy, at TS Lombard said in a note this week. “And both institutional and individual investors remain somewhat bearish.”
Breadth shows wavering conviction as well. The percentage of stocks trading above their 200-day moving average is 20%, compared with 70% to 80% last year when the S&P (NYSE:SPY) was around the same level, Cicione noted.
The current high equity prices also seem to be dismissing the seismic shift that’s happened to the economy, pricing in a V-shaped recovery where the angle of the V is approaching 0 degrees and things are reverting back to how they were in no time.
Friday’s employment report brought into sharp relief the pandemic economy landscape. The BLS reported that 20.5 million jobs were lost last month and the jobless rate spiked to 14.7%.
Jobless claims figures gave investors a good idea of what to expect, but stocks have still rallied. A lot of that may have to do with expectations of a sharp rebound by both investors and those recently out of work.
About 77% of laid-off or furloughed workers expect to be rehired by their previous employer, according to a Washington Post/Ipsos poll out this week. But economists aren’t so optimistic. The Post also noted that a report from the University of Chicago’s Becker Friedman Institute predicted that 42% of job losses from the pandemic will be permanent, with businesses closing and spending curtailed sharply even after reopening.
Meanwhile things could still deteriorate. The Minneapolis Fed’s Neel Kashkari said Thursday the true unemployment rate could be as high as 24% and the recovery will be “slow”.
The new landscape will likely also feature something to which Wall Street is especially averse: higher taxes.
The Treasury is borrowing a record $3 trillion this month to pay for the stimulus programs launched to stabilize the economy. And there could be more programs to come if Republicans and Democrats can agree.
“There is one clear implication: The era of tax cuts is over,” Jim Millstein, co-Chairman of Guggenheim Securities told Bloomberg. “People who have been fortunate enough to be able to make significant incomes are going to have to make a greater contribution.”
Written By: Investing.com
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Subramanian P V Subramanian P V
Till when can fed hand hold economy ? The cycle will return when fundamentals will reflect on stocks. May be bull in short term as businesses open but long term bull is not sustainable .will have to see SPY by mid 2021 to understand what way the dice turned. ... (Read More)
31 minutes ago· Reply
steven gitt steven gitt
It's not really a stock market anymore when all the Fed does is manipulate the underlying currency to devalue it and shift funds to prop up the market any time risk is introduced. It is basically a large money market fund. ... (Read More)
35 minutes ago· Reply
ORSONWELLES ORSONWELLES
I do not believe stimulus shall prevent the impending Depression, only stall the inevitable. No one man, no one government ever broke the markets. It was always the other way around. SOROS beat the Bank of England. The Silver market beat the Hunt Bothers and surely, the stock market shall defeat D. J. Trump. It's call comeuppance ... (Read More)
an hour ago· Reply
spooky sms spooky sms
The FED is money printing machine that will inflate the bubble even larger and whops when it gets burst! Economic data and fundamentals will play in the next wave! ...
