- The stock market had one of the best performances of the past week.
- President Donald Trump is looking for a big rebound after the coronavirus pandemic broke out.
- Unfortunately, economic fundamentals at best point to moderate returns for the Dow Jones.
Donald Trump sings the praises of the stock market after one of the best weeks on Wall Street for almost 50 years. Unfortunately, while the President is optimistic about a V-shaped recovery, the evidence suggests that more pain may be coming for the Dow Jones.
Trump seeks V-shaped recovery as Dow Jones barely misses best week since 1938
President Trump took every opportunity to inject investor optimism when the stock market rebounded, but previous efforts have failed. Backed by dramatic gains in the Dow and the S&P 500, will he be right this time? It doesn’t look good.
Currently trading above 23,000, the Dow Jones has risen like a phoenix from the ashes, after the coronavirus pandemic briefly pushed it into the grip of 18,000 points.
If Trump is right, it was the best week in the S&P 500 since 1974; it was almost the best for the Dow Jones since 1938. History has shown that these moves can be a strong indicator that something is wrong under the hood.
The stock market ignores the fundamentals while the bulls dominate
The S&P 500 has apparently been fueled by optimism about the slowdown in the coronavirus curve in the United States.
In addition, the Fed’s denial of the impact of the closure on the debt-laden “zombies” has created an obvious gap between fundamentals and price action. All of this has stock bears tearing their hair out.
Several key economic indicators are flashing among the worst warning signs since the 1930s. First, unemployment is getting out of hand.
More than 16 million Americans have lost their jobs in the past three weeks. And there seems to be no end in sight to the lockdown.
Even California flattening the curves won’t open anytime soon
Although White House officials marvel at the flatness of the COVID-19 curve in California, LA County (the wealthiest and most populous county in the United States) extended its shelter directive by place until May 15th.
To put the impact of that in perspective, if LA County were a country, it would be the 19th largest in the world, and based on real GDP is even more prosperous than the oil titan Saudi Arabia.
California as a whole is by far the richest state, and its decisions tend to guide the decisions of other states for nothing but economic necessities.
This suggests that other regions will follow suit and make it more difficult for Trump to fulfill his dream of smashing the economy.
Another economic driver, N.Y.C. is the hardest hit place in the country and Governor Cuomo is unlikely to be in a hurry to reopen.
Is the Dow valued for a long-term battle? It doesn’t appear that way.
Rising unemployment and deflation are red flags for the Dow Jones
Another major red flag for the stock market is the fall in inflation. Deflation seems to be there, and while this may sound good news for the economy, it is terrible news for a consumption-based economy.
American households are the most powerful engine of growth in the global economy, and the idea that the Dow Jones could return to record levels with consumers on the side makes no sense.
So what do we need to see for Trump’s hope to come true? Probably a much larger expansion of the Federal Reserve’s balance sheet. This is precisely what we are seeing, as Jerome Powell is doing his best to ease the financial pressures amid a global rush for the US dollar.
With record capital outflows recorded last week, it is obvious that something quite gigantic is going on behind the scenes.
Ben Carlson of Ritholtz Wealth believes that Fed intervention could simultaneously eliminate the risk of a monster market crash while reducing future returns, as he said in a recent study,
If the stock market during the worst economic contraction of 90 years can be smoothed out by government spending and the actions of the Fed, does that change the risk-return framework of the stock market in the future? In other words: if stocks do not present the risk of a Great Depression type crash on the table, does this mean that expected returns should be lower in the future?
Combine this intriguing concept with the fact that ordinary life is interrupted even after the lifting of general closings, and the idea of reduced equity returns seems even more convincing.
So is it realistic that the Dow Jones can break out of the ice and smash to reach records? Of course not, but that doesn’t mean the Fed won’t do its best to alleviate the bumps.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.
This article was edited by Aaron Weaver.