Most analysts are bearish about the stock market, but a sizable minority thinks we still have more room to grow. Who's right?
According to Citigroup’s quarterly survey, nearly 70% of asset managers expect that a 20% correction is more likely than a 20% move higher in the stock market. This means that 30% of them expect the next 20% move to be higher. Strategist Tom Lee is still bullish despite the pandemic having a worse economic effect than the Great Depression.
It might seem surprising that almost a third of the pros are bullish about the stock market despite all the headwinds it’s facing.
While buy-side managers have an average weighted target for the S&P 500 that is almost flat compared to current levels at 3,027 by the end of the year, a third expects the index to close above 3,200. This is very close to the S&P 500 pre-pandemic levels.
Nobody knows for sure what’s going to happen next in the stock market. The S&P 500 could finish the year in positive territory. But unfortunately, this scenario seems too optimistic.
U.S. equities have recovered from much of the pandemic-induced selloff because of the Fed’s support. Hopes about a quick economic recovery have also bolstered stock values.
But the return to new record daily coronavirus cases in the United States seriously jeopardizes the scenario of V-shaped recovery. Some states have either slowed or reversed their reopening plans.
Such a sharp recovery is unlikely. The market’s earnings consensus is an upside scenario. The pandemic is still raging, and even if mortality rates look good and hospitals are not overwhelmed, the coronavirus is a massive headwind for sentiment. If this keeps up, life does not return to normal until everyone can agree on some therapeutics that will lower the mortality rate even more, or there is a vaccine.
The increasing uncertainty about the future of the economy is a barrier to spending at the household and business level. Economic data for May indicated that the economy had bottomed out and was improving.
But the second round of restrictions could result in a double-dip, which could reverse optimism about a reopening.
The reality is that as long as the virus remains a material threat, economic activity cannot fully recover. The more prolonged activity is subdued, the more companies will close permanently, and the longer it will take for the economy to recover.
A full recovery in employment could take years to return to pre-pandemic levels. About 30 million Americans are collecting unemployment benefits. Many of those won’t get their job back.
The CEOs of America’s largest companies expect the pandemic’s commercial impact to last until at least the end of 2021. But almost a third of them fear it will persist beyond next year.
The stock market could rally higher if the government finds ways to keep the virus under control and if it provides enough support to help people most affected by the pandemic, especially low-income workers.
But unless the epidemic is subsiding or a credible treatment or vaccine is discovered, the bearish case is more likely. A stock market correction of 20% appears more likely than a rally of 20% at this point.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned companies.
Last modified: September 23, 2020 2:01 PM