Too Fast Too Soon?

We’re obviously pleased US stocks and our model portfolios have recovered so strongly from the COVID-19 bear market. Quick and strong medicine from the Federal Reserve, as well as federal and state governments, has turned investor sentiment around. Stocks have been on a tear for more than two months.

But let’s not get ahead of ourselves. We see several major headwinds which point to a long and uneven economic recovery. We see rich valuations by any traditional measures; massive unemployment which will be slow to turn around; re-thinking of tension with China; an explosion of government debt, and the associated uncertainty for future government spending. In our view, the stock markets have come too far, too fast at this point. It may be wise to be prepared for a pullback as we work through this uncertainty.

In March congress authorized almost $3.0 trillion in three phases to taxpayers and businesses. This money came in the form of direct relief payments, loans, and grants. The rally in stocks has focused primarily on the short-term effects of the stimulus, minimizing the long-term ramifications of these actions. The explosion of government debt is worrisome, but investors are not thinking of that right now.

Also supporting stocks prices has been the stabilization of Americans’ outlook for economy. In mid-April, sentiment stabilized.

Now that global coronavirus cases have peaked and containment efforts are now receding, sentiment will continue to improve slowly barring a significant new wave of infections.

Low yields will continue to help stocks. On the short end, the Fed will stand pat for the foreseeable future, certainly well into 2021 at least.

In our view, however, conditions on the ground don’t support current equity prices. Let’s start with the job market, where more than 40 million Americans are currently unemployed. Many businesses won’t survive the COVID 19 lock downs. Domestic supply chain disruptions will continue to hit certain industries. Recently Goldman Sachs changed their forecast for the S&P 500 from a drop of a little over 22% from current levels to a drop of 10%