Landon Whaley provides a stern warning to market bulls.
This week’s “Headline Risk” comes courtesy of a recent Barron’s article proclaiming “The Bear Market Is Ending. The Bubble Might Just Be Getting Started.”
Rather than waste our time dissecting analysis from a Wall Street-adjacent media outlet like Barron’s, there is a far more constructive use of our time this week.
Let’s begin with my finest Babe Ruth impersonation: the 2020 calendar year will be defined by not one, not two, but three distinct market environments.
Not 1, Not 2, But 3
The first regime was depressionary, and it began in late February and ran through April. The stock market crashed, crude oil traded with a negative price, millions of people lost their jobs, and businesses boarded up like it was hurricane season in the Caribbean.
The second regime was the rebound off that depressionary level thanks to $5 trillion in Federal Reserve stimulus and free money from Washington arriving in every person’s mailbox. The rebound saw: a +56% rally in the S&P 500 off the March 23 lows, crude oil ripping 32% higher, one millionpeople per week losing their jobs (instead of 3-5 million), and a dead-cat bounce in the critical economic data sets from “worst ever” levels in March and April to “not so worst ever” readings in May and June.
I’m on the record multiple times during this rebound calling for a third phase to hit the United States in the September-October-November timeframe. In sharp contrast, the folks on Wall Street and in the media perpetuating the myth of a “V-shaped” recovery are not prepared for the third and final phase of 2020. Heck, they aren’t even looking for it!
The Data Says What?
I didn’t expect to see a significant slowing in the U.S. data until the August data was released in September or possibly the September data reported in October. However, we are already seeing data sets from June and July slow sequentially. Amongst the early data confirming my “there will be a third regime” call: industrial production, factory orders, construction spending, and the Empire State Manufacturing Index.
On the labor front, everyone was coo-coo for Cocoa Puffs during the first week of August when unemployment claims fell below one million (971K) for the first time since the pandemic began. Unfortunately, claims have experienced their own bounce and are once again back above one million for the last two consecutive weeks. The cumulative job loss over the previous 23 weeks is now 58.4 million. Simply staggering. It’s no wonder the August consumer confidence survey is sitting at the same level as it was in April when this whole thing began.
The bottom line is you can either believe the fiction coming out of Washington about a “Super V” economic recovery, or you can believe the data.
Now let’s turn our attention to what the markets are telling us in real-time about a third and final regime here in 2020.
Markets Say What?
First off, it doesn’t take a 20-year vet like me to know that if the United States were in an economic recovery, yields would be ripping to the upside. Instead, yields are as dead as disco.
Second, if a recovery were underway, gold would be getting the woodshed treatment. Instead, the barbarous relic has gained an additional 25.3% since U.S. stocks bottomed on March 23 and is now up 37.8% year-to-date. Take that Nasdaq!
Third, the breadth of companies taking part in the recent S&P 500 rally is saying clearly, “no recovery for you!” As of Aug. 21, there are 128 companies (26% of the index) still down more than 25% for the year, and 25 other companies (5% of the index) still crashing more than 50% year-to-date.
Folks, if the U.S. was staging the recovery of all recoveries, then three things would be true. First, a chart of U.S. yields would be confused for a chart of Tesla. Second, gold would be living in Buffalo Bill’s basement. Third, 143 stocks (nearly one-third of the entire index) in the S&P 500 wouldn’t still be taking the elevator shaft to the first floor.
The Bottom Line
Once again, the media and Wall Street are looking at the most recent trends across markets and economic data and extrapolating those trends forever into the future. This extrapolation bias is leading the vast majority of market participants to believe the gravy train since April will keep right on rolling.
Make no mistake; there is a litany of market risks over the balance of the year. Regime Three of 2020 is upon us, trade accordingly.
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