Stimulus Blitz Fools Funds Into Loading Up on Stocks, but Another Crash Is Likely

Stimulus measures prompt hedge funds to buy U.S. stocks, but it’s better to be prudent since another market crash is likely.
US stock market
Hedge funds and other portfolio managers are loading up on stocks under the misguided assumption that the market has bottomed. | Image: Nicole Pereira/NYSE via AP
  • Fund manager Jim McDonald is favoring U.S. stocks after the tremendous policy response from American authorities.
  • He thinks people will be willing to spend.
  • The reality is the economy will likely run at a slow pace until we find a way to contain the coronavirus for good.

Jim McDonald, the chief investment strategist at Northern Trust Corp., is bullish on U.S. stocks because of the massive stimulus.

McDonald is betting that the fiscal stimulus will be large enough to compensate for the destruction of demand caused by the virus.

But he cautioned:

We think there will be sufficient willingness to spend, but if we get a negative surprise – if the coronavirus reaccelerates globally significantly – that would be a problem.

He also said:

Everyone will have an outlook but the reality is the economy is very dependent on the path of the coronavirus and the success in opening it back up.

McDonald is optimistic about the U.S. stock market outlook, but there are many reasons not to be.

Stimulus Wont Make Americans Spend More

The stock market hit bottom and rallied recently because new COVID-19 cases have slowed down. Trump said the United States had passed the peak on new infections. But when the government reopens the economy, we could face a second wave of infections, just like Singapore, Taiwan and Hong Kong.

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As long as the coronavirus spreads somewhere, it can spread everywhere. If there is a resurgence of coronavirus cases after the U.S. ease lockdowns, the stock market will take a hit.

Plus, even with massive government stimulus, people will probably not be willing to spend that much. Unemployment could hit 13% in June.

Americans who lose their jobs won’t spend much outside of essentials such as housing and groceries. Plus, even if they have the money, they could be hesitant to go to restaurants and movie theaters from fear of catching the virus.

What we are dealing with is a health crisis, not a financial crisis like in 2008. Monetary stimulus won’t make people go out and spend if they are sick or afraid of catching the virus. The economy will probably not return to normal for a very long time.

Recovery will probably look more like a U-shape or an L-shape than a V-shape. The U.S. economy has entered a deep recession due to stay-at-home orders–a slowdown that could turn into a more severe depression. The International Monetary Fund predicts the “Great Lockdown” recession will be the worst since the Great Depression.

Many believe that the economy will bounce back once we get a coronavirus vaccine, but it probably won’t be available until next year.

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The Bear Market Might Not Be Over

Although risk premiums have declined from peak levels in March, the CBOE VIX is still high compared to history–suggesting that investors anticipate a significant deterioration in fundamentals in the coming quarters. A further drop in the VIX to a more normalized level of 20-25 would coincide with an increase in stock prices.

CBOE VIX, Yahoo
VIX is still high relative to history. | Source: Yahoo Finance

Historically, bear markets have lasted for several quarters. But the last bear market lasted only 19 trading days. The recent run was likely just a rally within a bear market. So, the stock market could crash again.

It appears more prudent to stay on the sidelines than buy stocks now, just like Charlie Munger is doing.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.

Sam Bourgi edited this article for CCN - Capital & Celeb News. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

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