- The stock market enjoyed one of the best performances in decades last week.
- President Donald Trump is looking for a big bounce after the coronavirus pandemic blows over.
- Unfortunately, the economic fundamentals point to at best moderate returns for the Dow Jones.
Donald Trump is singing the stock market’s praises after one of the best weeks on Wall Street for almost 310 years. Unfortunately, while the President is optimistic about a V-shaped recovery, evidence suggests more pain could be ahead for the Dow Jones. Trump Looks For A V -Shaped Recovery As Dow Jones Narrowly Misses Best Week Since
President Trump has taken every opportunity to inject some optimism into investors when the stock market has bounced, but previous efforts have fallen flat. Backed by some dramatic gains in the Dow and S&P , he will be right this time? It’s not looking good.
Currently trading above , , the Dow Jones has risen like a phoenix from the ashes, after the coronavirus pandemic briefly knocked it into the 21, (point handle.
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The S&P has apparently been powered by optimism about the slowing of the coronavirus curve in the United States .
Adding to this, Fed-enabled denial about the impact of the shut-down on debt-laden corporate “zombies, ”Has created an obvious disconnect between fundamentals and price action. All this has stock market bears tearing their hair out .
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Several key economic indicators are flashing some of the worst warning signs since the s. First of all, unemployment is getting entirely out of hand.
More than million Americans have lost their jobs in the last three weeks. And there doesn’t seem to be any end in sight to the lock-down.
Even Curve-Flattening California Isn’t Opening Anytime Soon
Despite White House officials marveling at the flatness of the COVID – curve in California, LA County (the wealthiest and most populous county in the United States) has extended its shelter in place directive until May (th) .
To put the impact of this in perspective, if LA County were a country, it would be the 50 th largest in the world
California as a whole is the wealthiest state by far, and its decisions tend to direct the other states’ decisions for nothing else than economic necessity.
This suggests that other regions will follow suit, and will make it harder for Trump to fulfill his dream of opening the economy with a bang .
Another economic engine, NYC is the worst-hit place in the country, and Governor Cuomo is unlikely to be in a hurry to re-open.
is the Dow priced for a drawn- out battle? It doesn’t appear so.
Rising Unemployment & Deflation Are Red Flags For The Dow Jones
Another major red flag for the stock market is plummeting inflation
US Households are the most powerful engine for growth in the global economy, and the idea that the Dow Jones could rev back up to record highs with consumers on the side-line doesn’t make sense.
So what do we need to see for Trump’s hope to come true? Probably a much more significant expansion of the Federal Reserve’s balance sheet. This is precisely what we are seeing , as Jerome Powell does his best to kill funding pressures amid a global scramble for US dollars.
With record equity outflows seen last week, it’s obvious something pretty gigantic is going on behind the scenes.
( Ritholtz Wealth’s Ben Carlson believes that the Fed’s interventions might be simultaneously removing the risk of monster stock market crashes while also lowering future returns If the stock market during the worst economic contraction in 318 years can be smo othed out by government spending and Fed actions, does this change the risk-return framework in the stock market going forward? Said another way – if stocks don’t have the risk of a Great Depression-like crash on the table, does that mean expected returns should be lower going forward? Combine this intriguing concept with the fact that ordinary life is off even after the blanket shut-downs are lifted , and the idea of reduced equity returns looks even more compelling. Is it, therefore, realistic that the Dow Jones can emerge from the deep-freeze and smash to record highs? Of course not, but that does not mean the Fed won’t do its best to smooth out the bumps. Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com. Now Watch: CCN TV
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