Recent Stock Market Optimism Warranted?
The S&P 500 finished last Friday @ 2874.56. That figure is only 15% below the S&P All-Time closing high of 3,385 – recorded only a couple of months ago on February 19th. The intra-day low hit during this period is about 2200 in March. The range so far has been amazing; 2200 through 3385. That’s a lot of fluctuation in a very short time. My guess is some records have already been set.
What’s Already Priced In?
Here’s a brief laundry list of what’s already priced in, meaning what the market already knows.
- Our Federal Reserve has expanded its balance sheet to $9.3 Trillion, close to double the previous record!! The 2020 deficit projection has been expanded from $1.1 Trillion to about $2.7 Trillion. THE FED IS ALL IN!!
- Congress passed the CARES Act on March 27, throwing over $2 Trillion of stimulus which includes $1200 personal stimulus checks, $500 Billion in company loans, $350 billion in small-business loans that is current being expanded and much higher unemployment benefits. OUR GOVERNMENT IS ALL IN AND MORE IS LIKELY TO COME!
- Many Virus statistics are in the process of “peaking” according to our Health Care Experts.
- The re-start of our economy seems to have a light at the end of the tunnel as the government is discussing the path to reopen with many pushing the envelope.
- We have had over 22 Million people file for unemployment.
- GDP (Gross Domestic Product) projections for the 2nd Quarter are ranging from an optimistic (-12%) to a pessimistic (-38%) with smaller negatives in the 3rd Quarter and perhaps going positive in the 4th
- China’s 1st Quarter GDP came in at (-6.8%)
- China and Germany are beginning to reopen their economies.
What May NOT Be Priced in?
- Bankruptcies will certainly happen. Today, I read Neiman Marcus is filing. We should expect several more to be reported. In March, US retail sales were reported down by (-8.7%). Apparel down (-50.5%), furniture (-26.8%), restaurants and bars (-26.5%). Keep in mind that we were still out and about shopping and dining through about half of March. April’s numbers will probably look awful. Many businesses even with Government support will not survive.
- Bond Defaults – Most companies operate with leverage in the form of debt. These bonds are owned by individuals and institutional (think mutual funds) investors. What happens if companies don’t have the cash flow to make the interest payments on their debt?
- How will investors truly react as the Economic Numbers are announced at records lows? Many are expected an unemployment rates to be published for April @ 20%. We will be told that has peaked.
- Oil has been in free fall. Certainly it’s a pleasure to fill our gas tanks for a much smaller debit, however the spill-over impact to our economy can be significant.
- How will be move forward with the re-opening of our economy? Masks, gloves, social distancing….. who knows what to expect. We can only speculate based on what we hear and believe to be true. However, the fact is, no one knows with any degree of certainty. Someone will guess correctly, then suggest they’re a hero at some point for sure!
What To Expect?
My comments are in no way meant to be negative, however keep in mind the markets overshoot significantly to both the up and down sides and as we’ve just witnessed, this can happen at warp speed.
I personally believe as of last Friday, the stock market is pricing in a pretty smooth re-opening transition with a smooth path to normalcy. I ABSOLUTELY believe we will get back to a good economy, however I do not believe the path is straight up or straight forward. So, be patient, be smart. Stay diversified with your investments and don’t be greedy!!
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