Higher, at least for now. Then lower, as the market completes its full cycle.
Optimists believe that the pandemic will disappear and life will soon return to normal. Pessimists also believe that this is true. They just disagree on the timing.
Few can argue that the optimists are in control of the market right now. They buy every dip, they don’t seem to care about bad news, and they assume that government money will continue to flood the economy until order is restored. They may be right. I’m not so sure.
What could go right?
A continuation of Fed buying of corporate bonds, even junk bonds.
The Fed continuing to flood the Zone with cheap or free money.
Congress continuing to give away free money to everyone, whether they need it or not.
An effective and affordable vaccine.
What could go wrong?
Earnings. When you strip away the enthusiasm of the optimists, you’re faced with corporate earnings. After all, the market is essentially a mechanism that anticipates growth of earnings and dividends.
Economic growth. UBS puts global GDP growth at minus 4,1% for 2020, and they are firmly in the optimist camp.
Unemployment. It looks to me like high unemployment is going to be a sticky number. The savings rate has gone up because people are scared about the future and they’re saving for a rainy day. The rainy day is already here.
Consumer spending. If you’re saving, you’re not spending. Eventually you will, but not for the forseeable future. I’ve postponed redecorating my master bath until I know that my income is safe.
Worsening pandemic. We’ve all seen the numbers and they aren’t good. The optimists are looking past the hard data and assuming that a vaccine is coming soon. It might, and it might not.
What I Think
I think the optimists have gotten a little too far out over their skis. They have momentum on their side and the Fed on their side, but they don’t have the pandemic or corporate earnings on their side. Remember that stock prices reflect the expected growth of earnings and dividends. The recovery of earnings and dividends that are anticipated by the optimists have to show up. They will, eventually, but when? I don’t know, and I bet you don’t either.
The Stock Market
The S&P 500 closed at 3,215 today, July 24th. We’re only 5% away from making a new all-time high. If we do, the optimists will be out in force, crowing about a new bull market or the resumption of the 11-year old one. Who can blame them? Certainly not me, because I can’t argue against the numbers.
But I have an uneasy feeling that we might be entering bubble territory in the market, the Fed’s balance sheet, and the budget deficit level. At some point, there has to be a price to pay for this profligate spending. Maybe not until the 2020 elections are over. Maybe not until the unemployment checks run out. Or maybe not until the Fed begins to transition from accomodation to austerity.
I don’t know when it’s coming, but I think it will come when we least expect it.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.