The Wall Street perma-bulls are once again dancing in the streets. The S&P 500 is up over 20% from its (very) recent bottom. Officially, U.S. markets are back in “bull market” territory. Happy days are here again
It’s a nice fairy tale. But it has no basis in reality.
The reality is that we are still in the very early stages of a global pandemic. This novel coronavirus has three traits that make controlling it (let alone stamping it out) extremely difficult:
- Highly contagious
- Long incubation period (perhaps as long as 24 days)
- Significant percentage of asymptomatic carriers
Invisible (asymptomatic) carriers can be spreading COVID-19 to other victims – who may not begin to show symptoms for two weeks or longer. Without full testing of our populations (less than 2% of Americans have been tested), the only reliable means of arresting the spread of the pandemic is some form of “shelter in place” isolation. That spells economic devastation.
Ordinary people and the real economy have already begun to feel this pain. The number of Americans who missed their mortgage payment soared by 1064%
in March. Over 30%
of U.S. renters failed to make their April 1st rent payment.
The pain is equally severe among Small Business. Nearly half of U.S. small businesses didn’t make a full rent payment on their commercial premises for April. Roughly 30% have made no payment at all while the remaining 20% made a partial payment, according to a poll by Alignable.com
The real economy has just begun to feel the (extreme) pain of an economic crisis that could easily last for 12 – 18 months (the duration of the Spanish Flu pandemic of 2018).
As U.S. COVID-19 deaths and infections continue to spiral out of control
, U.S. markets have not even started to price in this economic pain. Zerohedge’s Tyler Durden explains.
Just How "Cheap" Is The Market? Here Is The Shocking Answer
…Fast forward to today [April 7th], when Credit Suisse chief equity strategist Jonathan Golub - usually one of the most bullish Wall Streeters - posted a quick observation suggesting that any "temporary" cheapness in stocks hit in late March was long gone for the simple reason that forward earnings have plunged. As a result, as of noon when the S&P 500 had risen as much as 22% from March 23 lows, forward stock multiples had surged right back 19.0x.
Why is this notable? Because as Golub writes, "this is the same level the S&P500 held on Feb 19, the all-time high."
An economic nightmare has just begun. It’s impact on Corporate America will be severe and prolonged. Yet U.S. markets have not even started to price in this inevitable downturn.
Where will the S&P 500 end up when U.S. markets do correct to rational levels? Respected analyst David Rosenberg supplies some metrics
in this Financial Post
article from April 2, 2020.
…We looked at prior recession-era bear markets back to the Great Depression. On average, 83 per cent of the prior bull market is reversed in the bear market and the median retracement is 69 per cent.
What that means is that if this current downturn is an average cycle, the low on the S&P 500 would be 1,135. The median performance would peg the low at 1,515. [emphasis mine]
As of this writing, the S&P 500 is sitting at 2,780, floating higher for the 4th consecutive day on extremely low volume. It would (will) take a lot of antacid to allow long investors to endure a ride to 1,515. It would take a parachute for longs to survive a drop to 1,135.
The REAL rally in gold
U.S. equity markets are floating higher in perverse denial of underlying economic fundamentals – and their strong-and-inevitable impact on corporate earnings. As earnings collapse and
multiples compress, it isn’t going to be pretty.
Then we have the gold market.
Gold is supposed to rally in times of economic uncertainty. We have never faced more uncertainty in our lifetime.
Gold is supposed to rally in times of high inflation. The Federal Reserve has openly acknowledged that its ultra-inflationary monetary policies are already more extreme than its response to the 2008 financial crisis.
That period of monetary madness propelled gold from its 2008 bottom of $800 per ounce to over $1,900 per ounce, a move of roughly 2.5 times. What is gold doing today?
After being driven down to a bottom of $1470 during the current market turbulence, it rose as high as $1742 in intraday trading
on April 7th. That’s a 7 ½ year high.
A move of 2.5 times from gold’s recent bottom of $1470 would take the yellow metal to approximately $3,675 per ounce. But the U.S. economy has only started to feel the pain from the COVID-19 pandemic. The Federal Reserve has only started
its “emergency” measures to attempt to prop-up markets.
And the rally in gold has just begun.