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Stock Market Bears Sweat Because This V-Shaped Recovery is No Myth

Last Updated September 23, 2020 1:59 PM
Joseph Young
Last Updated September 23, 2020 1:59 PM
  • The U.S. stock market is nearing its record high as retail investors show no signs of pulling back.
  • Stocks bull Edward Yardeni says a V-Shape recovery is in the works.
  • Investors are showing more confidence in stocks as the economy reopens.

The U.S. stock market is nearing its all-time high as investors dismiss stark warnings from billionaires. 

“Too many people” expect a V-shape recovery, billionaire Sam Zell said last month. He was one of many billionaires who suggested the U.S. economy is permanently damaged  from the pandemic.

But, stock market bulls are proving to be right. The Dow Jones Industrial Average (DJIA) surpassed 27,110 points as it smashed through a key technical resistance level at 27,090 points.

stock market
The U.S. stock market continues its rally towards record high | Source: Yahoo Finance

Why Were Billionaires Wrong About the Stock Market Recovery?

Three months ago, the U.S. stock market recorded a 37% drop from its local peak . The uncertainty around the pandemic, jobless claims, and the economy scared investors away from equities.

Hedge funds experienced their biggest quarterly outflows  in over 10 years in the first three months of 2020, according to HFR.

Fearful investors withdrew upwards of $33 billion, rushing to safer alternatives like low-risk bonds and cash.

With a double-digit unemployment rate  and millions of small businesses at risk of capitulation, the logical prediction was a stock market downtrend.

But, the stock market has been nothing but logical.

Major bailouts, an aggressive Federal Reserve policy, and the Trump administration’s determination to reopen the economy pleased retail investors.

Now, the stock market is about a 9% gain from hitting its record high for the second time in 2020.

stock market
Source: Newt Gingrich 

There is a real chance that institutional fear of missing out (FOMO) could trigger an enormous stock market rally in the coming months.

Hundreds of billions of dollars are sitting on the sidelines at hedge funds and money markets holdings rose to $4.7 trillion.

UBS says the high level of cash savings investors stacked up in the past two months can prevent a further stock market downtrend .

If investors have large cash reserves, it will prevent them from selling stocks at a low point.

The bank said:

[The cash reserve] helps avoid the need to sell potentially high return assets at the wrong time.

The U.S. stock market plunged steeply in late March as $2.1 trillion worth of value  was wiped out.

The money markets and hedge funds alone added a similar amount of cash since March. Once the floodgates of Wall Street opens, U.S. equities may see the greatest bull run yet.

Stocks Bull Ed Yardeni Says V-Shape Recovery is Coming

Edward Yardeni, president of Yardeni Research, said the U.S. economy will see a V-shape recovery in the short-term. 

He said:

It is going to be a V-[shape] initially. Real GDP could be down 40% to 50% in the second quarter.

In the third quarter of this year, Yardeni emphasized that the probability of seeing a 20% increase in GDP is high.

Americans are rushing to find new jobs in the market and another $1 trillion stimulus package  reportedly in the works.

High liquidity, growing demand for equities, and the likelihood of a massive increase in GDP in the upcoming three months show the momentum of the stock market can be sustained.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.