The stock market, whether you look at the S&P 500, Dow, or Nasdaq, has been partying like its 1999…
By June 6th the S&P 500 was up 45% in a 54-day rally that was the strongest sine 1933.
However, the market has absolutely gotten ahead of itself, becoming totally disconnected from a pandemic, economic or earnings fundamentals.
Last week the market suffered the worst day in three months, and the 46th worst of all time with the S&P 500 falling 5.9% and the Dow 6.9%.
I monitor the pandemic, economic and earnings situation closely each week for Dividend Kings, as part of our very thorough Weekly Recession Updates which cover
- credit/financial market health (to monitor for signs of a financial crisis)
- economy/small business updates (including the weekly Census Bureau’s survey of small businesses)
- earnings/market valuation updates (including long-term expected returns out to five years)
- pandemic update: second wave risk, transmission rates in each state, vaccine progress, and global viral transmission (because global infections eventually make their way here).
This week’s update included the first second-wave models from the IHME which has both good and bad news for the US economy, corporate earnings, and the stock market.
The Data Simply Doesn’t Support A V-Shaped Recovery
There are few economists I know of that still believe in a V-shaped recovery.
Morgan Stanley on Monday updated its base case for S&P 500 growth through June 2021, citing a swift economic recovery.
The bank raised its base case for the S&P 500 to 3,350 from 3,000 through June 2021, implying a 10% jump from Friday’s close, according to a Monday note from strategists led by Mike Wilson.
“A faster re-opening than expected along with a powerful combination of fiscal and monetary stimulus all support an economic and earnings recovery,” Wilson wrote.” – Business Insider
Morgan is applying a 20X forward PE to its recently revised 2021 EPS projections which are 22% above the 25-year average of 16.4.
In fairness to Morgan JPMorgan recently penned a very bullish note about how stocks might surge 47% off Thursday’s lows because it too is expecting a rapid economic recovery.
However, so far, the economic data absolutely doesn’t back up such bullishness.
(Source: New York Fed, Dallas Fed, Harvard)
Using 10 weekly/daily reports, the high-frequency indicators, the NY Fed’s Weekly Economic Index shows that we appear to have bottomed but…
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