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Stock Market Meltdown Is Doomed to Get Worse: Wall Street Economist

Last Updated September 23, 2020 1:46 PM
W. E. Messamore
Last Updated September 23, 2020 1:46 PM
  • The stock market looks set to secure a solid weekly gain, Friday’s downturn notwithstanding.
  • But that’s just the sugar rush from the $2 trillion stimulus package and a promising slowdown of coronavirus cases in China.
  • A famed Wall Street economist says the stock market still hasn’t priced in stagnant corporate profits and ballooning corporate debt.

The stock market made an impressive comeback this week, even if it did pare those gains on Friday.

As the $2 trillion dollar stimulus bill neared passage in Congress, the benchmarks mounted a forceful rally.

stock market , dow jones, nasdaq, S&P 500
The broad stock market recovery carried the Dow (black), S&P 500 (blue), and Nasdaq (red) off their lows. | Source: Yahoo Finance 

Boeing stock led the rally with an insane bounce  off the relief package for airlines. That’s why the Dow did markedly better than the S&P 500 and Nasdaq

Some investors think the stock market crash might even be over .

In addition to the unprecedented emergency financial relief, China had welcome news for the world Tuesday. Authorities there announced they would lift the lockdown on Wuhan , the epicenter of the pandemic. New cases of coronavirus had been slowing  consistently in China, reaching the single digits earlier in the month.

But that doesn’t mean the stock market meltdown is over.

Why the Stock Market Crashed So Quickly

This week’s rally was bigger than the six previous bounces since the market crashed in February. That doesn’t mean it will last.

Many economists and financial strategists were stunned and dismayed by how quickly the stock market crashed, and how far it fell from February’s all-time high levels.

The reason why the stock market crashed so drastically is valuations were incredibly frothy by January. That month we noted the perilously high stock prices relative to corporate earnings, alongside record overvaluations relative to GDP.

The coronavirus pandemic – and the worldwide lockdowns to contain it – cut through that tall layer of froth like a hot knife. But there’s still plenty of overvaluation left in the stock market

And unfortunately, that’s in a best-case coronavirus scenario, which is still a wild card.

Corporate Earnings, GDP, & Unemployment

David Rosenberg, chief economist of Rosenberg Research & Associates, said Thursday that the stock market crash isn’t over – massive rally or not.

stock market crash not over corporate earnings flat david rosenberg
Source: Twitter 

That morning, Fed Chair Jerome Powell went on national television for a live interview to assure the American people that despite the hit from coronavirus, there’s “nothing fundamentally wrong with our economy.”

But that doesn’t jive with five years of zero growth in corporate profits. The stock market crashed so fast and hard because investors knew valuations didn’t match stagnant earnings. Stock prices were even more misaligned with GDP than before the housing market and dotcom bubbles burst.

The U.S. faces a decline in GDP that Goldman Sachs forecasts to be 2.5 times uglier  than the previous historical low. Goldman expects a gut-reeling 24% plunge in GPD next quarter. Morgan Stanley’s outlook  is even more brutal.

When those data come in, we’ll see the Buffett Indicator hasn’t settled nearly as low as it looks today . And the next two rounds of corporate earnings reports are going to be a sobering snap-back to reality. Not to mention Earth-shattering unemployment figures .

The stock market will eventually price in those figures. It’s only a matter of time.

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