The U.S. economy is heading into a recession, maybe a greater Great Recession than the last one. Yet, despite that frightening prospect, equity markets - having just tumbled from their mid-February 2020 all-time highs to their March 23, 2020 coronavirus lows - are already back in full bull market mode.
Something's not right.
Either the market's right and the worst is over for most publicly-traded companies, or the buy-the-dip crowd's got it wrong and a deeper-than-expected or longer-than-expected recession is going to knock stocks back to their lows or maybe take them a lot lower.
Here's how the heavyweight battle is playing out and how smart investors can win either way.
For the Economy, It's All Good Until It Isn't
Everything was going along swimmingly, for the economy and a lot more so for stock investors, until the novel coronavirus unleashed death and destruction on mankind and economies around the globe.
The Dow Jones Industrial Average had just made another record high, in a long series of higher highs, on February 12, 2020. The S&P 500 and the Nasdaq Composite made all-time highs on February 19, 2020.
U.S. GDP, gross domestic product, rose 2.3% in 2019 to $21.427 trillion, according to the U.S. Bureau of Economic Analysis. GDP grew at a 3.1% clip in 2018. It grew at a 2.5% clip in 2017.
Then COVID-19 descended on us, or rose up from hell, it's more likely origin, China notwithstanding.
Warning: Trillions of dollars of Fed "stimulus" can't stop COVID-19 from devastating markets and economies - but it can sure make things worse. Find out what's next in this just-released report...
As news of cities being locked down, rising infection rates, and mounting deaths circulated globally, stock markets began selling off.
From its February 12, 2020 high to its March 23, 2020 low of 18,591.93, the Dow Jones Industrials fell 10,976 points, or 37.12%.
From the S&P 500's February 19, 2020 highs to its March 23, 2020 low of 2,237.40, the index tumbled 1,156 points, or 34.06%.
The Nasdaq Composite fell 2,977 points, or 30.26%, to its low of 6,860.67.
On Tuesday, April 14, 2020, with stocks only 22 calendar days off their lows, and the first round of big bank earnings just out for JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co. (NYSE:WFC) uglier than analysts' expectations, stocks climbed higher in early trading. Wouldn't you know it, the Dow rocketed 650 points, or 2.8% higher, the S&P jumped up 82 points or 2.95%, and the Nasdaq Composite skyrocketed 282 points, or 3.45% higher.
Based on what, I don't know, maybe bad news coming out?
Any which way you look at it, it's a bull market.
Off their March 23, 2020 lows, at the highs of trading this morning, the Dow's up 28.98%, the S&P's up 26.63%, and the Nasdaq Composite's up 22.77%.
In other words, they're in bull market mode, big-time.
At Tuesday's highs, the Dow was only off 18.69% from its February highwater mark. The S&P's only down 16.22%. And the Nasdaq Composites down just 13.86%. That's not bear market territory anymore.
Clearly, equity investors are discounting any and maybe all expected bad news on upcoming first quarter earnings. Maybe they're discounting any bad earnings companies will post in the second quarter too.
Or maybe they're not looking at how bad earnings could be, how bad GDP growth could be, and are buying because they're afraid of missing out on markets rebounding in a "V-shaped" pattern off their lows, which is exactly what they've created with their FOMO buying.
About that recession...
Since companies make their sales in the real world, make their revenues, profits and losses in economies, not in a vacuum, maybe we should take the economy's temperature, which we do in a number of ways, one them, a big one being GDP growth.
On the heels of 2019's GDP growth coming in at 2.3% (annualized), the first quarter of 2020 looks scary.
The Atlanta Federal Reserve Bank tallies a rolling estimate of GDP which it calls GDPNow. Their latest update has Q1 GDP coming in at a +1% annualized clip. That's not bad.
However, my tally of 36 analysts' estimates found across the internet, yields an average of 0.5% growth. The lowest estimate for Q1 comes from JPMorgan Chase at MINUS 10%. The highest estimate, and there were two of them, came in at +5%.
Then I looked at the Conference Board's website to find out what its members, who run the biggest companies in the United States, think Q1 GDP's going to be. Their call is for a contraction of 5.8%. Ouch!
Enjoy it while it lasts.
Estimates for Q2 GDP are considerably worse.
How I'm Investing Now
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JPMorgan back at the end of March had Q2 GDP contracting at a 25% clip. Last week they changed their forecast to minus 40%. Goldman Sachs is a lot more upbeat. They raised their estimate from minus 34% to minus 24%.
The average of analysts' I surveyed came in at -25%.
The Conference Board's estimate is a contraction of 33.3% in Q2.
Sticking with the Conference Board, because other analysts' estimates for Q3, Q4, and the year are so all over the place it's really not funny, GDP in Q3 is expected to be flat, and for the whole year they see GDP contracting 6.6%.
For some perspective, the 2007-2009 Great Recession saw GDP, from peak (December 2007) to trough (June 2009) fall 4.3%.
That seemingly, relatively small contraction was the largest decline in the post WWII era.
Still markets today want to go higher. They are acting like the bad news is all behind us, even though the first outer bands of a category-5 hurricane are about to mess up our hair.
Is something wrong? Are investors wrong to be bidding up stock prices in the face of what's about to be at least two quarters of frightening earnings and probably massive losses, not profits?
Maybe they are wrong.
Maybe they're right, and we'll get though the next few quarters and earnings will rebound with the economy, that's if you consider the economy, measured by GDP, contracting 6.6% this year to be a rebound.
My gut tells me the collapsing economy will knock down the market. But, my market experience, going on 39 years, says go with the trend, which is now up, again.
Since I'm torn, as most of you are about all this, here's how I'm going to play it.
I'm going to start taking positions in stocks I want to own long-term, but I'm not going to buy all the shares I want. I'm going to allocate 20% of the capital I'm earmarking to new position now and buy in.
Then I'm going to start selling put options on all those positions.
If markets go down and I get assigned on the puts I sold, I will have to buy more shares of the stocks I want to own at the strike prices of the put options I sold. That means I'll be buying shares at lower prices, which I want to do if the market backs up here or in the future.
If the market drops quickly, not only will I buy stock as a result of selling put options, I'll buy more shares on big down days.
If the market remains range bound, I'll keep selling puts.
If I don't get assigned on the puts I sell, maybe because the market's flat or it goes higher, I'll keep the options premium I get for selling the puts.
If I end up buying stocks on the way down, averaging down in price, I'll end up with the core positions I want to ride the next bull market up with.
If the market keeps going up, good for me, I love buying stocks that are going up.
Either way, I'm going in because the only thing that's not right is not making money at the end of all this.
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The post The Economy vs. The Market: Something's Not Right appeared first on Wall Street Insights & Indictments.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.