The Dow Jones (DJIA) is roaring back to life today, but one Wall Street CIO warns that stocks are on the verge of a 50% crash.
The Dow Jones Industrial Average (DJIA) is plowing higher on Friday as the stock market scrambles to recover from yesterday’s vicious crash. The index is up more than 600 points, which translates into gains of around 2.5%.
Wall Street analysts continue to debate what triggered yesterday’s sell-off, which saw the Dow plunge 1,861.82 points, and perhaps more importantly – where it goes next.
Bulls allege that investors were just taking profits following a feverish upswing and point to data that suggests the economic recovery at least resembles a V.
But bears warn that the Thursday tidal wave was the canary in the coal mine for U.S. stocks – and that investors should brace for steeper losses ahead.
Today’s move to the upside seemed almost inevitable. Volatility begets more volatility, and big trends in the stock market “don’t move in straight lines.”
That’s why no one on Wall Street seems particularly shocked that stocks are primed for what would otherwise look like a strong end to the week – if it hadn’t immediately followed a plunge that was three times as large.
As of 9:35 am ET, the Dow Jones had spiked 670.34 points or 2.67%, lifting the index to 25,798.51.
But even after today’s bounce, the index is still heading for a weekly loss of around 1,300 points.
The S&P 500 rose 2.5% to 3,077.03, while the Nasdaq jumped 2.52% to 9,731.83 to round out Friday’s recovery.
Analysts don’t agree on why the stock market plummeted so precipitously on Thursday.
Various justifications have been bandied about, ranging from fears of a “second wave” of the pandemic to concerns about the global economy. But neither of those concerns caught investors by surprise – nor did they vanish overnight as stocks prepared to rally.
And just like they can’t agree on what ignited the sell-off, there’s little Wall Street consensus about what it means for a stock market that had virtually erased its pandemic plunge.
Scott Minerd, the CIO at Guggenheim Partners Global, buys into the “second wave” narrative. And that’s why he doesn’t think the stock market has a sunny forecast.
“The recent highs have been a selling opportunity, and I think we’re going to have a tough slog here, especially with the increasing number of… cases that are coming up as a result of the reopening,” he told CNBC.
“If the stocks are trading at 30, maybe 35 times earnings, then yes, it’s a bubble. Those sorts of valuations are really historically extreme and in all likelihood end in tears,” he added.
That’s the bear case, and if Minerd’s right, it will see the Dow and its peers careen 50% off their recent highs.
But the bulls have a different story to tell.
They say that stocks had been rising so far, so fast that consolidation was inevitable. That doesn’t mean the rally is over, just that profit-taking is the natural product of a move that has been so singularly heated.
And while the Federal Reserve may not have said much that caught investors off guard at its policy meeting this week, stock market bulls allege that the central bank’s support for risk assets has created a sort of floor for equities.
“There’s just too much cash sitting around for this to be a deep correction,” Ken Peng, head of Asia investment strategy at Citi Private Bank, told the Wall Street Journal.
“The Fed and other major central banks have already made it very clear they’re there to buy the bottom basically,” he said.
As far as the economic picture is concerned, ING says the story is somewhat more complicated.
Led by Chief International Economist James Knightley, the investment bank has revised up its near-term outlook in response to positive data that has accompanied the United States’ emergence from lockdown.
Knightley points to housing market strength and an unexpected rebound in auto sales as “hints” of a V-shaped recovery, and he says last month’s surprise rise in employment is a bullish indicator too.
But ING still isn’t convinced that the recovery will continue this aggressive pace over the longer term. The bank warns that home and auto purchases don’t necessarily reflect broad economic strength.
Noting that the average homebuyer is 47 years old and the typical car buyer is roughly the same age, Knightley explains why the health of these consumers is an outlier given the nature of this particular economic crisis:
[T]hey are older, more affluent with better credit history so better able to take advantage of some of the great deals available relative to a younger person working in hospitality or retail and who has recently lost their job.
He concludes that a V-shaped recovery in these sectors may not translate into a full V-shaped recovery in GDP.
The medium-term risks suggest a full V-shape recovery is unlikely with a return to pre-[pandemic] activity levels many quarters away.
Of course, markets are forward-looking, so in some ways, the actual economic statistics will matter less than how they line up with what investors expect.
So that inevitably raises another question that’s sure to spark unceasing debate among analysts: What is the stock market pricing in?