@theMarket: The Virus Versus the Fed

Bulls and bears are in a tussle. Market averages reflect the battle that is moving stocks down, up, and then sideways throughout the week. It is a phase where investors are in a data-dependent mood and the data isn't all that good.

 

The bears are watching the COVID-19 cases climb higher every day, which threatens to trash their expectations for a "V" shaped recovery. The bulls, meanwhile, aren't too worried. They are banking on the Federal Reserve Bank's promises to keep pouring added stimulus support into the financial markets just in case the virus pushes the economy further toward the brink.

 

It did not have to be this way. 

 

A few months ago, America had a chance to beat this pandemic. That was before the president decided to politicize the virus, pretend it wasn't serious, and then fumble the response when he realized it was. Now, with the number of new virus cases hitting the highest level since the onset of the pandemic in America, he chooses to simply ignore it.

 

We are left holding the bag. However, readers are also aware that the American people are not blameless. For weeks I have been warning that the general disregard for following medical guidelines among the public was likely to produce the present results. When our politicians encourage this behavior, and even support gun-toting radical groups to storm state houses, this is what you get. 

 

Twenty-seven states (and counting) have witnessed an increase in COVID-19 cases. The worst hit among them followed the president's urgings to re-open, downplay the risks, and get the economy moving again before the election. New York Gov. Andrew Cuomo, who has paid his dues combatting the worst outbreak in any American state, said it best. "You played politics with this virus, and you lost."

 

So, what happens now? Most likely, we get a few more rounds of positive economic data points, such as stronger retail sales, higher manufacturing numbers, etc., but those are "rebound" numbers from a low, low base. After that, the data will look less rosy and may even decline, if the virus numbers increase and begin to spread outward from hotspots in the West and Southeast.

 

The economy, as we know by now, is not the stock market. The stratospheric levels of the indexes are all about Fed stimulus. The thinking here is that as long as the helicopter money is still raining down from a central bank sky, buy stocks. Fundamental news, such as the results of yesterday's stress test by the nation's large banks, which at one time would have been important, has little to do with what happens to their stock prices. 

 

Speculation in the markets by new retail investors, stuck at home, and trying to make money day trading, adds another unpredictable element.  It is their buying, for example, that is bidding up the stocks of bankrupt companies, like Hertz and GNC, or chasing unproven "story" stocks at a few cents a share to see them double or quadruple in a day, or a week. My advice is buyer beware if you are trying to play that game, because they almost always end badly. 

 

June is almost over, and I expect there will likely be more turbulence early next week. There is some talk of a large end-of-quarter rebalancing among institutions from stocks to bonds, after the strong equity gains this past quarter. That could cause some additional selling, maybe another 100-point risk to the downside in the S&P 500 Index.

 

However, contrarian indicators, such as bearish investor sentiment, and high short interest on the S&P 500 Index, plus expectations of another massive fiscal stimulus bill next month, would indicate that stocks are still in a bullish phase. Last week's advice, therefore, to "buy the dips" remains in place.