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The stock market's recent behavior has been nothing less than spectacular and one for the record books. Within the last three months, stocks reached a historic high on February 19th only to suffer the sharpest pullback in history over the following four weeks during which it lost more than a third of its value. The market made a stand on March 23rd and recovered about half of its lost ground over the ensuing three weeks. Now, stocks are rebounding and the focus is shifting to reopening our economy. But there are those with less optimism due to the market drifting sideways over the last couple of weeks. So where do we go from here as parts of the U.S. economy start reopening? Let's examine the landscape of bullish and bearish arguments to help you make up your own mind. Let's talk about the Bull case first. 1) Looking Past the 'Engineered' Downturn: The unprecedented lockdown of the U.S. economy will undoubtedly exact a heavy price in terms of lost economic output and jobs. But this downturn isn't a result of a structural weakness in the economy, but rather engineered by the government as a mitigation measure against the global pandemic. Markets can see through to the fact that the U.S. economy entered this downturn in the best possible shape, with household and business confidence at near record levels on the back of a multi-decade low unemployment rate, rising wages and record corporate profits. Irrespective of whether the shape of the recovery resembles a 'V' or 'U', there is little doubt that pent up demand effectively guarantees a very strong rebound, even though some parts will likely remain under pressure until we completely see the back of this pandemic. 2) Unprecedented Policy Response: The fiscal and monetary response to the economic pain caused by the pandemic has been swift and without parallel in history. The dollar amount of the different measures instituted by Congress, the U.S. Treasury and the Fed is in excess of $10 trillion, about half the size of the economy. The speed with which the small-business relief program has been put into action is truly impressive and very effective. This ensures that households and businesses will have sufficient liquidity to navigate the 'engineered' downturn and stand ready to get back in action as the economy reopens. More . . . | ||||
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| 3) Strong Banks Mean Smooth Recovery: Regulatory reforms instituted after the global financial crisis ensured that the U.S. banking sector was in rude health as the pandemic arrived. Banks will suffer losses as a result of this 'engineered' downturn as many of their customers are unable to pay back their loans. We saw evidence of that in the recently released Q1 earnings reports where all the banks created provisions for such credit losses. But all of them have the financial wherewithal and capital cushions to absorb those losses and will not need the U.S. Treasury or the Federal Reserve backstopping them, as was the case back in 2008. Banks are the lifeblood of the economy as they ensure the efficient transmission of capital to different economic actors. The successful implementation of the aforementioned small-business relief program has been possible only because of the health of the banking sector. The Fed left interest rates unchanged this week and will likely remain on the sidelines for now, after cutting rates three times last year to shield the economy from negative global influences. The overall monetary policy stance across all the major economies, including the U.S., remains favorable and supportive of the market. What this means is that even though the Fed isn't cutting rates currently, it will continue to keep interest rates and overall financial conditions supportive of stocks for the foreseeable future. In fact, the Fed pledged to keep interest rates near zero until the economy gets back to full employment and inflation returns. And they will continue to buy Treasuries and mortgage-backed securities until they reach their price stability goals. Let's see what the Bears have to say in response. 1) Market Complacency about Economic Recovery: The stock market's strong rebound from the March 23rd lows suggests a best-case scenario for the U.S. economy, with the bulk of economic pain concentrated in Q2 and a strong recovery getting underway in Q3 and accelerating after that. It is unlikely that the recovery will be swift or strong for two main reasons. First, key parts of the economy are simply incompatible with social-distancing measures which have to remain in place until an effective vaccine is available to combat the pathogen. Second, while the U.S. economy was in good shape ahead of the pandemic, the same wasn't the case with most of the major global developed and emerging economies. In other words, the process of economic recovery beyond the U.S. will be slow and drawn-out keeping export-oriented parts of the U.S. economy under pressure. Importantly, this lackluster global economic outlook will have implications for corporate profitability as roughly 40% of S&P 500 earnings come from abroad. 2) A Durable Hit to Confidence: The risk to human life, a function of the highly contagious pathogen, is a unique aspect of this economic downturn. As a result, previously benign activities like eating out or taking a flight or any activity that involves physical interaction with others has been weaponized. This is a big blow to confidence that is unlikely to go away until we fully see the back of this pandemic, which will only happen after an effective vaccine arrives. 3) The Market's Fed Addiction: The market's Fed dependence has only increased as a result of this pandemic. The central bank not only cut interest rates to near-zero, but has been playing an active role in ensuring market liquidity and backstopping corporate balance sheets. In other words, the Fed has reinitiated on open-ended quantitative easing or QE program that will significantly expand its balance sheet. The Fed's balance sheet currently stands at $6.6 trillion, up from $4.29 trillion in early March, with the expansion far from over at this stage. It is unfashionable to be concerned about growing fiscal deficit and the associated ballooning Federal debt as everyone seems to have subscribed to the so-called 'modern monetary theory', or MMT, that calls for open-ended and unlimited borrowing. This may not be an issue in these unsettled times, but we know that there is no such thing as a free lunch and that debt always needs to be paid back. Where Do I Stand? I don't dismiss the bearish arguments entirely, but I don't see them adding up to an extended downturn for the U.S. economy and an end to the spectacular rally we've seen so far since it got underway on March 23rd. The reality is that we have learned enough during the lockdown to navigate the coming transition period when the economy reopens even as the pathogen is still amongst us. The health of the U.S. economy ahead of the pandemic and the very strong fiscal and monetary response, coupled with pent up demand, ensures that we will start seeing the beginnings of a robust recovery. We will be seeing a host of outright ugly economic and corporate earnings results in the coming days. But that's no surprise, as we know the U.S. economy was in stand-still conditions through April, and likely parts of May. However, it's important to keep in mind that stocks are also climbing on earnings optimism as the market applauds results from companies, including Google, Microsoft, Tesla and Facebook. Markets are forward-looking pricing mechanisms; it has already discounted the very weak economic data that will be coming out over the next two months. Stocks will be interpreting the easing in infection rates and the opening of state economies as the beginning of the recovery process. These are historic times for the economy and the market. And historic times create historic opportunity. All in all, this is the best time to be fully invested in the market, particularly if you are investing for the long haul. And I would definitely be a buyer on any dip because it looks like there's a lot more upside to go. Where to Look and How to Get Started Today is an ideal time to take advantage of this historic time for our economy and the market which is why I'm inviting you to look into our unique arrangement called Zacks Investor Collection. It enables you to access the picks and commentary from all our long-term portfolios in real time for the next 30 days. Plus, it includes Zacks Premium research so you can find winning stocks, ETFs and mutual funds on your own. To put the odds of success even more in your favor despite the recent ups and downs, our Special Report, 5 Stocks Set to Double, reveals 5 stocks handpicked by Zacks experts that have tremendous upside potential. Each is the personal favorite of a Zacks expert to have the best chance to gain +100% and more in the months ahead: Stock #1 - Recent FDA Approval Could Send Shares Soaring Stock #2 - Big Competitive Edge in a White-Hot Industry Stock #3 - Retailer Rides Surge in Online Demand Stock #4 - Financial Juggernaut Thrives on Volatility Stock #5 - Standout Internet Service with Explosive Upside The earlier you get into these stocks the higher their profit potential. Also, the opportunity to download this bonus report, 5 Stocks Set to Double, ends midnight on Sunday, May 3. Get started now with Zacks Investor Collection and 5 Stocks Set to Double » Thanks and good trading,
Sheraz Mian serves as the Director of Research and manages the entire research department. He also manages the Zacks Focus List and Zacks Top 10 Stocks portfolios. He invites you to access Zacks Investor Collection. | ||||
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