Last quarter was the best result for Wall Street from the last 20 years. However, remember that it is normal for the biggest bull markets to come in the recovery from a recent crash as we have seen recently. An interesting piece on Bloomberg’s market’s live blog made a bearish case for stocks yesterday. Below is the summary in ten points. This article is supportive of those who are highly skeptical of recent stock rebounds and particularly focused on the challenges involved with the longer-term impacts of the virus on jobs and the economy.

Reasons for bears to hold shorts

  1. Despite recent minor falls in equity markets the major indexes still look expensive. 13 of the 20 biggest stock markets (market cap exceeding $500 billion) traded June 26 at forwarding p/e at least 3 points higher than at the end of 1h, 2019, but most price-to-book ratios note.
  2. Risk assets are now skewed to the downside in light of point 1 above as future earnings will struggle to justify further price gains.
  3. Investors seem short-sightedly focused on the short term trajectory of the pandemic rather than its long term impact. This is short-termism.
  4. The Global economy will take many years to recover from due to the pandemic’s long-lasting effects. Hundreds of millions have lost their jobs, some sectors of the economy will need re-tooling and some may not even be able to re-start operations.
  5. Airlines, cruise ships, mall owners, and tourist companies all face uncertain futures. For example, Qantas airways is forecasting no international travel for one year and no A380 flights till 2023.
  6. With PMI’s around the world being heralded as the ‘V’ shaped recovery such indexes they would need several months well above 50 before they signal any sense of a full recovery. Also, note that they are leading indicators.
  7. US GDP forecasts are for a -5.75% shrink in 2020, followed by +4.1% growth next year and +2.9% expansion in 2022. By the end of 2022 the US would still be behind where it was expected to be this year before COVID-19. This is a slow projected recovery.
  8. Upcoming US elections are set to deliver more partisan politics and division in the US and that can drag on economic recovery.
  9. The US-China trade war is still bubbling away in the background and that has the potential to flare up at any time.
  10. Assets have recovered too fast, too quickly and as company profits dwindle so will asset prices as earning start getting released showing the impact of the virus.

All about jobs?

One of the further big questions is how will the job market be impacted post COVID-19? If the job market can keep going then that bodes well for consumption. One key aspect will be NFP due out tomorrow. Remember that around 70% of the US’s GDP comes from its consumers. If job losses start coming in waves then the bearish case outlined above starts becoming a reality. For now, fiscal and monetary stimulus is keeping the bull case going, but that can’t fight millions of job losses. NFP will be a key focus for tomorrow.