3 Reasons for the Stock Rally to Stop
Many of you are probably wondering how in the world can the US stock market rally when we are getting incredible increases in unemployment and the economy is likely in a recession? In this video, we’re going to cover the top 3 reasons why stocks rallied and top 3 reasons why stocks will fall.
There have been some major crashes in the US stock market over the last 100 years and no, I haven’t been around for all of them, but it feels like I have.
1929, 1987 Black Monday, Dot.com crash in 1999 are all great examples.
But our recent crash reminds me of the time when I was a new parent babysitting my daughter and couldn’t find her…for about 30 minutes.
The emotions went from feeling proud, to getting distracted, to pure panic to pure joy.
All within less than a half hour.
On 2/19, the S&P 500 put in a new all-time high, then by 3/22 it lost 35% and by 4/28 it gained 33%.
Simply amazing and something I’ve never seen over my career in the markets and finance.
We know why it went down, but why did it rally so fast?
First, unprecedented, rapid intervention by both the federal government, the US Treasury and the Federal Reserve to ensure a functioning financial system and to get money out to those who either lost their jobs or businesses that were forced to shut.
Think about this, over the last 6 weeks there has been over $550B of new debt issuance by US corporations to shore up their liquidity and balance sheets.
Essentially, the central bank ensured that corporate American’s cash flow continued.
Second, the possibility and progress of drug therapy and vaccines. Remdesivir and other drugs are showing promise to treat the virus and vaccines are in trial now faster than we’ve ever experienced. Even the research on the virus is being published much faster than before and shared. All of this is amazingly helpful towards solving this nasty COVID.
Third, reopening announcements. Remember when we only focused on the number of infections and deaths? Now, it seems the markets lost their interest on this and have been monitoring the initial attempts by states to open up their economies. This is getting tracked as closely as the number of infections and more states are attempting to find a path forward every day. This is great news for the over 20 million who have lost their jobs and businesses due to the shutdown and it carries the risk of having another closing should infections spike.
So those are the major 3: extraordinary amounts of fiscal and monetary stimulus, optimism on therapies and vaccines and increasing state reopenings.
Hey what could go wrong?
Three big ones.
Number one, a rolling reopening, then closing down again, then reopening pattern. Actually, I’d add that even when a state reopens, all the businesses are not going to rush to open up. They have to find a way to protect their employees and their customers or they won’t be open long. So, this entire process will take longer than the market is probably pricing in right now.
Number two, bankruptcies. Already the market is seeing some retail stores and airlines declare bankruptcy and this means the job losses will be permanent. Any job or business that requires large numbers of people either traveling together, staying together or joining together in a crowd will be under siege for some time until a therapy or vaccine is created. This could last for 3 months, 6 months, a year. Hard to say how long.
Number three, the reversal of the Trump tax cuts and higher state taxes. Here’s a mind numbing statistic, the US Treasury is going to issue $3T in new debt in Q2. $3T! This represents a massive expansion of deficit spending that has to be paid for somehow. States don’t have the same borrowing power and will need to raise revenues to pay for all the spending they are doing. I have to believe that the gas tax and some utility taxes have to increase as well to pay for any infrastructure spending that may be coming.
And one more I’d add, an international flareup from either US-China trade disputes or a downgrading of Italian debt would also help stop the rally.
So, the big three negatives are a false reopening, bankruptcies and higher taxes.
Goldman Sachs recently said they think we’ll see another 18% drop from here in stocks. My view is that we’re definitely going to bounce around from these levels and make everyone feel sick to their stomachs at some point, the same way I felt when I lost my daughter.
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