Get 40% Off
⚠ Earnings Alert! Which stocks are poised to surge?
See the stocks on our ProPicks radar. These strategies gained 19.7% year-to-date.
Unlock full list

Point/Counterpoint: U.S. Stock Bulls Vs. Bears

Published 05/08/2020, 04:59 PM
Updated 05/08/2020, 05:12 PM
© Reuters.

By Yasin Ebrahim and Kim Khan

Investing.com - Wall Street ended the week with another strong gain as investors managed to shrug off the worst drop in nonfarm payrolls ever.

The Nasdaq Composite turned positive for the year this week, with tech stocks remaining a particular point of strength. And sentiment looks strong as earnings season winds down and states across the U.S. begin to reopen their economies.

But has the rally got legs as summer approaches?

Yasin Ebrahim contends that the Federal Reserve will do whatever it takes to support the economy and for the foreseeable future equities remain the only game in town.

Kim Khan argues that the rally looks narrow, the employment picture will worsen and the days of tax cuts are in the rearview mirror. This is Point/Counterpoint.

The Bull Case

The Covid-19 pandemic has destroyed the jobs markets and left many businesses on the brink of financial ruin. But the pandemic's grip on equity markets has seemingly been short-lived as swashbuckling gains have followed on Wall Street since the March 23 lows.

Pointing to the disconnect between underlying economic conditions and surging equity markets, many are scrambling for answers at a time when the ultimate economic cure – a Covid-19 vaccine - is still some ways off.

But for others the explanation is simple: the Federal Reserve.

The most powerful central bank in all the land has cut rates within a quarter percentage point of zero and pledged to do whatever it takes to ensure that an eventual economic recovery is robust.

The Fed has expanded its asset purchases beyond Treasuries to include investment-grade debt, municipal bonds, ETFs and junk bonds, helping to stabilize credit markets and lay a softer landing for the coronavirus-ravaged economy.

The spending so far has taken the Fed's balance sheet to nearly $7 trillion, with the central bank recently conceding that it would need to more to support the economy.

The unprecedent move into unconventional markets and unrelenting support from the Fed has strengthened the narrative that the Fed will do whatever takes to support the economy.

"Don't fight the Fed," Morgan Stanley (NYSE:MS) said in a recent note. "This move (the Fed's $2.3 trillion stimulus) is in-line with our prior view that investors should have no doubt about the Fed’s resolve to do whatever it takes to make sure the recession does not turn into a depression."

Beyond the Fed, Congress has also ensured the well of stimulus remains deep, rolling out about $2.4 trillion in coronavirus aid to support individuals and businesses impacted from the coronavirus crisis.

Equities -- The Only Game in Town

With U.S. rates currently languishing at near zero and expected to turn negative next year, sitting in cash is not attractive, so equities remain the only game in town.

"(T)here would be no other place for these cash balances to go than chasing equities and bonds in the world as the need for precautionary savings subsides over time," JPMorgan (NYSE:JPM) said.

But the flows into equities are not indiscriminate. Unsurprisingly, it is the FAANGs -- Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), Google-Parent Alphabet (NASDAQ:GOOGL) -- and others like Microsoft (NASDAQ:MSFT), Zoom (NASDAQ:ZM) and Slack (NYSE:WORK) that are best suited to the current pandemic and beyond that are attracting attention.

While stimulus has played the biggest role in the most recent rally, the gradual lifting of restrictions across the country has underpinned hopes the economy has weathered the worst of the pandemic.

"We expect GDP to grow ... as firms and households learn to combine higher economic activity with continued virus control via a range of adjustment mechanisms including mask and glove wearing, frequent cleanings of workplaces, lower office and retail occupancy, and improved testing and contact tracing," Goldman Sachs (NYSE:GS) said.

Without a coronavirus vaccine the possibility of a second wave of infections could threaten the current rally, but for the time being traders are willing to bet the Federal Reserve “put” will remain in place until a Covid-19 vaccine is found.

The Bear Case

Investors should beware the bubble. Not an asset-price bubble bears usually speak about, but an economic bubble.

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.”

Latest comments

someone who teach trading?
The last ace in this economy is "income tax relief". Whoever gets that will get the elections!
Time is now for wealthy to do their part not run to private islands like scared b*****s
If you use models that were designed in normal situations to try and predict this anomaly and then find your estimates contradict the person who has the best sources to determine whether he should expect to return to work at his former employer. As an investor my money is on the guy who works there, adjusted down just a little because he wants to believe he's going back.
Lows of march are likely to be tested within next 2 weeks
How cone you are too sure So you mean to say the us markets will fall below 18 march 2020
Normally if people say this nowadays, you can assume that they've been saying this since end of March. In that case they were wrong for about 4-6 weeks. Yes, a broken clock is right twice a day and there are good reasons to expect a downturn... but at this point these comments are just a meme and not to be taken seriously unless there is an actual explanation given.
dow wont go over 27000 till 2021 dont be too bullish trade with care so you wont be sweeped
All time highs by August
point/counterpoint? Reminds me of the scenes from the Movie. The orchestra played even when the Titanic was sinking. The rich went for the few liferafts and the rest went down with the ship. And the people responsible discusses if the ship will sink or not.
Good analogy. For sure this is a game in which the rich will get richer and the poor will have to fofhr to survive. The great social divide widens again. Could also potentially produce a swing in public political sentimant at the base over the course of summer and into fall. Potential opportunity for liberals to tip the scale over.
gold up......
Trump wants to get reelected and he knows that usually means having a decent economy at election time.  Therefore he's prodded and pressured the Fed to lower rates.  He doesn't care about the long term, only the short term and his own tenuous hold on power.  Paradoxically this loose fiscal policy is pretty much opposite to traditional Republican theory and philosophy.
I'm buying more blue chip
Our whole system is the Fiat system. Everyone in their right mind knows we can never pay back the enormous debt because, there has been interest owed since day one!!!! Our system is a game of Monopoly. Monopoly is one of my favorite games. :-). Just play and enjoy the game??? If the Dollar was going to collapse it should have done so eons ago. Just except the facts everything and everyone is dependent on the Dollar. The world can't afford for the Dollar to collapse. Besides the Fed will do whatever it takes to make sure this never happens. By the way, I'm winning, are you???
There is no challenge from any other central bank. Now u have China that going to setup own exchange for commodity. Keep your winning safe and don't be complacent.
Bears? You mean those guys who keep needing more of daddys money?
Love the guy who compares gov't to a business as in "if any business ran their shop like these guys... they'd be out of business a long time ago". Gov't is not like a business... check your econ books. The important measure of deficit spending is the "Ratio of the interest rate to the total deficit".
It will all end badly. Someday, all that debt will come due at higher interest rates.US dollar will plunge much lower and serious financial consequences will follow and millions of americans will become poor.
"Yes, but for a beautiful moment in time we created a lot of value for shareholders."
FOMO bubble for sure! No other reason why we went this high so fast
well written article. I know you poor analysts get hammered in the comments so I'm making a greater effort to post when I believe an article is well put together. You accomplished that. Thank You.
I agree one of the better ones in a month or more.
Typical kick the can down the road by the government. Some day the bill will become due. If any business ran their shop like these guys... they'd be out of business a long time ago. PS..no incentive for lower income people to work...heck unemployment is competing with mom & pop businesses now.
What this article leaves out is the fact that all brokers have seen an increase of 400% + in small digital traders. Everyone who seen the crash and the low values took their savings and said i can double this by next year and went long. Big money, big investors, hedge funds and even buffet didnt see that coming and getting them to sell is nesr impossible. Even buffet couldnt tank the airlines all he could accomplish was a flood of short sellers who dumped them, brought the price down Temporarily until they covered and it went right back to where it was. Big money is staying out because they believe that there will be a double bottom if the stay out. Eventually reality will hit and they will jump in because Americans combined income will always be more than the Billionaires, good luck getting america to sell their long shares!!!
Funny that. Last I checked retail investors were the ones buying high and selling low - you know after everyone who knows what's going on has front run them. When did that change, again? Also, the Big Money is actually holding most of Americans' money - pension funds, mutual funds, hedge funds etc. Way more capital than all the freshly minted Robinhood heroes combined. You make one good point though - it's reasonable to assume that some of the recent bull action is fuelled by the newly signed up retail accounts. Which means there will be a big run for the hills when the sentiment turns. That's what retail is best at.
Dariusz I agree I had a coworker on Friday who is not very bright buying Boeing calls. I've never heard this guy talk about the market in 17 years.
This is all about Trump's re election. After that pull your heads out of where the sun don't shine and kiss the remnants of capitalism good bye
Trump is the only President who has the capability to put this country back together. The Socialist Democrats have been blocking every step, and spending money we don't have.
 And Trump is spending money you HAVE? Lol..................
 open your eyes
House of cards
You mean Wall St vs Main St...and we know who always wins that battle
The whole economh is NOT the stock matket.We arr buying the severly beaten down company’s shares.Red days are not far off again.Too much intervention. Too fast.The Fed inyroduced measures too rapid fire and we have been saying ever since. No more! Unfortinately the stock market is in for short term corrections
Bravo
One could argue the narrow breadth of 20% company avove 200MA is a bullish sign
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.