Most stock market predictions for the balance of 2020 have been pointedly negative - but that hasn't stopped stock prices from surging higher.
Most market forecasters are worried about the deep economic damage the coronavirus pandemic has inflicted.
Many small businesses forced to close have struggled to get promised federal help and may never reopen. Tens of millions of Americans have been put out of work, and it's unclear how many of those jobs will return.
In the aftermath of the lockdowns, permanent changes to consumer habits will make it harder for some businesses to recover.
And despite all the optimism about reopening the economy, it's unclear how smoothly and how quickly it will go. Meanwhile, new cases of the coronavirus continue to emerge.
Dreams of a "V-shaped" recovery - which would justify the rally - appear more unlikely by the day.
For all of these reasons, the majority of stock market predictions over the past few weeks have been calling for a reversal of a rally that surged 30% higher since the March 23 lows.
Many Stock Market Predictions Call for New Lows
"I'm certainly in the camp that we are not out of the woods. I think a retest of the low is very plausible," DoubleLine CEO Jeffrey Gundlach told CNBC's "Halftime Report" April 27. "I think we'd take out the low."
He added that he had put a short on the S&P 500 at 2,863.
Scott Minerd, the chief investment officer of Guggenheim Investments, had an even more pessimistic stock market prediction.
"Investors who are sitting out there right now who rebalanced a few weeks ago and moved from fixed income to equities should probably think about rebalancing again," Minerd said April 17. "It could be 1,500, 1,600, 1,200."
Economist A. Gary Schilling compared this year's market action to the early years of the Great Depression.
"This looks like a bear market rally, similar to that in 1929-1930, with an additional 30% to 40% drop in stocks to come as the deep global recession stretches into 2021," Schilling wrote in a recent Bloomberg opinion piece. "According to Bank of America analysts, the U.S. stock market has never reached its bottom in less than six months after falling more than 30% in the face of a recession."
It's hard to argue with the logic of these stock market predictions. But that's exactly what Mr. Market has done.
The question is why.
Why Mr. Market Keeps Going Higher
For sure, the willingness of the U.S. Federal Reserve to chop interest rates back to zero and restart its QE (quantitative easing) program has played a part. And then you have Congress passing trillion of dollars in assorted assistance and bailout programs for big companies, small companies, and individuals.
A Barron's poll of America's top money managers showed 83% are bullish on the stock market for 2021. Nearly 90% approved of the Fed's actions.
"[U.S. Federal Reserve Chair] Jerome Powell is a hero," Mark Keeling, chief investment officer at BTR Capital Management, told Barron's. "He didn't blink, he didn't hesitate, he went at it with full force, and that has really helped. For that reason, we think it is unlikely that stocks go back to the March low, because that was a panic-selling, lack-of-liquidity-driven event."
Money Morning Chief Investment Strategist Shah Gilani agrees the Fed action combined with the trillions in government relief triggered the rally.
"That was the bounce point," Gilani said. "And it happened quickly. The buy-the-dip-mentality was alive and well. People were ravenous. Once it started, more investors joined in because they didn't want to miss out."
The sharp steady rise also triggered a lot of short covering by the "smart guys" who had bet on the market going much lower.
"About 65% of the bounce was short covering," he said. "It had stocks leaping up."
But there's a key piece of the puzzle here Gilani said he wanted to make sure investors understood. More than anything else, this one Fed action set the markets into a buying frenzy.
It's something the Fed has never done before - not even during the 2008 financial crisis...
What the Fed Did to Fire Up the Markets
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The U.S. Federal Reserve's strategy to mitigate the economic damage from the coronavirus pandemic has borrowed from its 2008 playbook, but added several new wrinkles.
That has included a rapid lowering of the Fed's interest rate to zero as well as several efforts to keep credit flowing through the financial system, such as currency swaps, buying commercial paper, and hundreds of billions aimed at propping up small businesses so they can keep paying employees.
But the game-changing ingredient, Gilani says, was the Fed's announcement that it would start buying corporate debt - including risky "junk" bonds offered by companies with poor credit ratings.
"That was new. When the Fed is buying up corporate debt, investors don't have to worry," Gilani said.
Corporate debt hit a record $10 trillion last year. Many debt-laden companies already struggling faced a sudden drop in cash flow, many debt-laden companies faced issues obtaining needed credit. As the hit to the economy from the coronavirus became more clear, bond buyers started leaving the market.
The Fed, Gilani said, feared those holding bond ETFs would sell en masse, causing a crash in the bond market.
"The Fed knew that if the bond market collapses, the stock market will collapse on top of it," he said. "The message from the Fed was: We've got your back."
Sure enough, the bond buyers flocked back to the market. The assets of one bond ETF, the iShares iBoxx USD Investment Grade Corporate Bond (NYSE: LQD), grew by a third ($12.7 billion) in the weeks following the Fed announcement.
The question now is whether the drumbeat of terrible economic news at some point will force investors to rethink their bullish position, Gilani said.
"They'll have to ask themselves, 'If we go back down and touch those lows again, do I still want to own these stocks?'"
For now, the market is conflicted between the optimism inspired by the stimulus and some parts of the country reopening and the concern that the battered economy will recover far more slowly than first hoped.
Here's how to cope with these unsettled markets...
How to Survive the Coronavirus Market
"It's a very risky time," Gilani said. "It can also be lucrative, but you have to make cautious bets and be mindful of getting out."
"This is a stock-picker's market now," Gilani said. "And you'll need to have a long time horizon. It may take a long time to profit."
Gilani suspects the reality of a faltering economy will catch up to the stock market, forcing prices lower.
"But there's a big risk to trying to pick a bottom," he said. "Wait for a bounce, and be ready to buy lower so you can average down. Above all, don't be greedy. You don't want to get taken out."
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.