Posted in: Market NewsOpinion
Published:
May 19, 2020 7:00 PM

This Stock Market Rally Isn’t For Real — Here’s Why

More than two-thirds of professional investors think the stock market surge is a bear market rally, which typically precedes a deeper crash.
  • A widely followed Wall Street survey shows that more than two-thirds of professional investors think the recent stock market jump is just a bear market rally.
  • Recovery likely won’t be V-shaped as a second Covid-19 wave might hit in the fall.
  • A stock market crash is likely as stocks are overvalued.

According to the Bank of America Global Research Fund Manager Survey for May, 68% of respondents don’t believe the recent stock market surge off the March lows is the start of a real bull market.

Stock Market Surge Is Just A Bear Market Rally

Survey respondents believe we are merely in a bear market rally, even though the S&P 500 has risen 32% since the March 23 trough. A new bull market technically begins after the stock market gains 20% from its low.

After plunging 34% from its peak, the S&P 500 has surged and is now close to its 200-day moving average. | Source: CNBC

Uncertainty surrounding the coronavirus’ path and its impact on the economy first weighed on the stock market. The longest bull market ended abruptly in March after peaking in late February. The slide was the fastest ever into bear-market territory.

But the stock market started to surge after the Fed injected trillions into the U.S. economy.

A bear market rally is a rally that occurs during a market downturn. According to John Hussman, a former economics professor who now owns his namesake hedge-fund, every downturn has a false rally.

The stock market seems to be in the ‘return to “normal”’ phase. | Source: transportgeography.org

The stock market appears to be in the ‘return to normal’ trap of Jean-Paul Rodrigue’s “stages in a bubble” economic model. That means the real stock market crash might not have even begun yet.

Many Factors Could Cause A Market Crash

Survey respondents believe a vaccine would cause a V-shaped recovery. However, this optimistic scenario is unlikely as a vaccine probably won’t be available until mid-2021.

Mohamed El-Erian, chief economic adviser at Allianz, expects a repeated W-shaped stop-go recovery, where the economy swings between growth and contraction:

This is the biggest shock we’ve had for generations. It is going to be a long time before people can convince each other that we’re healthy.

The stock market rally looks very fragile for several reasons. The second wave of coronavirus could hit the U.S. in the fall, which would prolong the recovery.

Markets seem to be underestimating how the pandemic will change behaviors permanently. Consumers might be afraid to go to crowded spaces. Companies may trade office space for remote strategies.

Despite trillions of dollars in tax and monetary relief, many businesses won’t last after their shutdowns, especially small businesses. About a quarter of the labor force has applied for jobless claims in the last eight weeks. Many workers won’t get their job back.

Shawn Snyder, head of investment strategy at Citi Personal Wealth Management, said:

What’s really important is that these businesses are able to successfully reopen, bring back those workers, and stay solvent. If you see solvency issues, then that becomes something that I don’t think is really, completely priced in.

Another sign of an impending market crash is stock overvaluation. The S&P 500 forward 12-month P/E ratio is near its 20-year record as stocks have soared while earnings have decreased. Hedge fund manager Stanley Druckenmiller thinks that the risk-reward for equity is the worst he has seen in his career.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment advice from CCN.com.

This article was edited by Sam Bourgi.

Stephanie Bedard-Chateauneuf @SBChateauneuf

Stephanie has been writing about stocks and financial markets for several years. Based in Canada, she has written for The Motley Fool and Seeking Alpha. She received an MBA in finance and worked for National Bank of Canada. Check out more of her experience on LinkedIn + and follow her on Twitter. Reach her at stephanie.chateauneuf (at) gmail.com

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