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Dow Rally Sputters Even After 3 Huge Stock Threats Vanish

Last Updated September 23, 2020 2:00 PM
Ben Brown
Last Updated September 23, 2020 2:00 PM
  • Dow Jones Industrial Average (DJIA) futures pushed higher on Wednesday. New York trading was mixed, with the DJIA slipping midday.
  • Investor fears begin to fade as data shows strong economic rebound and promising virus treatments.
  • Stocks are still below fair value, according to one analyst.

The stock market continued its relentless march higher Wednesday morning, with Dow Jones Industrial Average (DJIA) rallying ahead of the open. The picture was more muted after the open as investors continued to monitor ongoing economic and geopolitical issues.

Sentiment was more optimistic earlier in the day amid signs that big investor fears are disappearing. In the last 24 hours alone, we’ve seen three bearish threats evaporate.

With the horizon looking brighter, one analyst thinks stocks are still below fair value . Even Wall Street’s biggest bears are throwing in the towel. Here’s James Bianco capitulating on his ‘bear market rally’ stance:

I think it’s foolish to stand in the way of [this stock market rally].

Dow rally fizzles

Dow futures  pushed 100 points higher, as the market looked to extend Tuesday’s impressive rally. However, the rally soon fizzled, with the Dow losing 36 points, or 0.1%, by midday.

Dow Jones, DJIA
Dow rally faces resistance. | Chart: Yahoo Finance 

Traders are still monitoring geopolitical tensions in Asia  and looking ahead to Federal Reserve chairman Jerome Powell’s second day in front of Congress.

The S&P 500 Index  edged up 0.1% while the Nasdaq  rose 0.6%.

Stock market threats fade

Over the last few months, Wall Street bears have been chanting about the same three things:

  • What if the consumer doesn’t come back?
  • What if there’s a second wave?
  • What if the economy is in a depression?

Day by day, each of these three fears are getting smaller. Just yesterday, U.S. retail sales bounced back by 18% , eclipsing the 8% expected rate. JP Morgan’s consumer spending tracker  shows a consistent rise since the March bottom. The consumer is coming back.

Consumer spending chart JP Morgan
Consumer spending is only 13% lower than pre-crisis levels. Source: JP Morgan

Despite the scary headlines, fears of a second wave are likely overblown. A new treatment in the UK, Dexamethasone, reduces deaths by a third in the most severe cases. And even if there is a second wave, countries are more vigilant and will react faster. For that reason, Morgan Stanley managing director Deyi Tan, says a second wave isn’t even part of their investment base case .

So at this point in time, we don’t expect a second wave to actually cause the global economy, or Asian economies, to go through a double dip.

And lastly, those fears of a Great Depression? Well, all signs point to an economy that is recovering faster than most anticipated. Everything from unemployment , mortgage applications , house prices , car prices , and dining out  has bottomed and begun to recover.

We know, from history, that the stock market bottoms well before the economy. If that holds up, the stock market bottom is almost certainly in.

The Dow and S&P 500 are below fair value

That’s the view of Stephane Monier, chief investment officer at Banque Lombard Odier. His firm’s base case is a V-shaped economic recovery. With that in mind, he thinks the stock market is still slightly undervalued.

We see the fair value of the S&P 500 around 3,200.

Monier has an optimistic case 3,600 if there’s a breakthrough in virus treatment. And a bear case of 2,700 if there’s a dramatic second wave.

S&P 500 stock market chart
Monier says stocks are currently sitting below fair value and could make new highs before the end of the year. Source: TradingView

Even the bears are capitulating

As the fears fade, the Street’s loudest bears are beginning to change their tune. Stanley Druckenmiller admitted he was “humbled” by the latest rally  while he sat on the sidelines. Now, researcher James Bianco has capitulated, too. Until recently, he was adamant this was a ‘bear market rally’. It might still be, but he began buying back into stocks last month .

Theres been a massive flood of money among retail investors into this market. And that doesn’t look like it’s stopping, and that is going to continue pushing this market higher.

He also said he didn’t appreciate the level to which the Fed’s support would sustain the rally.