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The stock market's recent behavior has been nothing less than spectacular and one for the record books. The major indexes have recouped their Covid-19 losses and are now at or close to pre-pandemic levels. The rebound followed the sharpest market downturn in history, in which stocks lost more than a third of their value after peaking on February 19th. The market rebound that got underway on March 23rd still continues, as economic readings show the U.S. economy steadily coming out of the downturn. But there are those with less optimism due to still-elevated infection levels and the market drifting sideways in recent days. So where do we go from here as the U.S. economy continues to recover even as parts of the country experience rising infection rates? 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 Downturn: The pandemic dealt the U.S. economy a severe blow whose effects will likely linger for a while. 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, as recent data about business and consumer spending, housing and other areas already show. That said, some parts of the economy will likely remain under pressure until we completely see the back of this pandemic. 2) Unprecedented Policy Response: As Congress puts finishing touches to extending the fiscal relief measures, it has to be acknowledged that the fiscal and monetary response has been swift and without parallel in history. The relief measures have helped replace lost wages for workers, assist small businesses in staying open and stave off solvency issues in industries hit hard by the pandemic. This ensures that households and businesses will have sufficient liquidity to navigate the downturn and serve as a bridge to the other side of the pandemic. 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 Q2 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's monetary policy stance remains favorable and supportive of the market. What this means is that it will continue to keep interest rates and overall financial conditions supportive of stocks for the foreseeable future. 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, the pace and magnitude of the economy's recovery has lost some of its momentum as a result of fresh infection outbreaks in the South and Southwest of the country. The recovery has gotten underway, but it will likely be slower and more drawn out than many in the market are banking on. 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 close to $7 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 the economic recovery will only gain strength going forward. The worst of the pandemic's economic and corporate earnings impact is already behind us, with the picture already starting to improve. As regular readers of my earnings commentary know, the earnings picture has notably improved with estimates for Q3 and beyond starting to go up in recent days. Markets are forward-looking pricing mechanisms; it has already discounted the pandemic-driven growth hit and was looking forward to the aforementioned turnaround in earnings outlook. Further confirmation of this favorable trend will further strengthen bullish sentiment in the market. 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 with expectations for unprecedented economic growth for the remainder of the year, and annual GDP growth next year to be the strongest in 38 years, 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 look into our Top 10 Stocks portfolio. It features the 10 best stocks to buy and hold this year and includes picks that have climbed +90.2%, +161.1% and as much as +187.6% so far this year.* Even better, Zacks Investor Collection gives you access to 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 - Revolutionary Tech Giant Dominates Region Stock #2 - Emerging Biopharma Stock Could Triple Stock #3 - Cloud-Software Sensation Set to Skyrocket Stock #4 - Industry-Best Shipper Primed for Energy Turnaround Stock #5 - 75% of Americans Aged 13-34 Use This App 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, August 2. 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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| *As of market close on July 28, 2020. This free resource is being sent by Zacks.com. We look for investment resources and inform you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer. Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research is not a licensed securities dealer, broker or US investment adviser or investment bank. The Zacks #1 Rank Performance covers the period beginning on January 1, 1988 through July 6, 2020. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank #1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performance for information about the performance numbers displayed above. Zacks Emails Zacks Investment Research |
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