14.07.2020 – Special Report. The S&P500 has just made the short leap into the annual plus. Was there something? Corona, maybe? Right – a second wave is imminent. And the company’s second quarter results could be horrible. In addition, the Federal Reserve could stop supporting the market. A number of pessimists have just spoken out about this. We are analyzing their statements.
The Fed warns
One of the most cited factors in the financial market at present is the fact that the Federal Reserve could simply step out of support for the market for a short time. In fact, the US budget deficit of $3 trillion has now reached the level of 14 percent of gross domestic product – the highest level of national debt since the end of the Second World War. The question is whether and how the Fed can and will continue to support the economy.
In fact, an important functionary has expressed himself in this very direction. Robert S. Kaplan, the president of the Dallas Fed, warned that emergency loans “won’t be left in place indefinitely”. He further stressed, “he is a believer that we will need to get back to more unaided market function without as much intervention from the Fed. We’re just not at that point yet. So, at some point, the Fed’s cheap money could dry up.
The Black Swan flies in
And the legendary Nassim Taleb also provided a bearish undertone. The creator of the Black Swan told CNBC that he does not expect a V-shaped recovery, which most investors believe in. We think: the charts say otherwise. However, according to Taleb, the rise in the market seems odd to him, as Covid-19 infections and deaths have increased. Although the masters of money printed this as if there was no tomorrow, this would not help.
Taleb expects that the fear of Corona would continue to plague the economy and the markets for some time to come. His conclusion: investors should not operate in the market without a “tail risk hedge”. We translate: A hedge for a completely unexpected and seemingly impossible event at the long, low end of the probability curve. Nassim Taleb literally: “If you don’t have a tail hedge, I suggest not being in the market [as] we’re facing a huge amount of uncertainty…
Crash warning ahead
And the readable blog “Motley Fool” also reminded investors that now was a good time to restructure the portfolio. Because there is a decoupling between the performance of the market and the real economy. Although millions of Americans live on unemployment benefits, the market has entered a rally. It said literally: “It’s evident at this point that another crash will happen; the only question is when. Here’s why investors should be bracing for a possible crash as early as this month.” So, at the end of July there’s the threat of a crash – we are excited.
Only a few stocks are supporting the rally
With this we let another bear have its say in the end. Bank of America Merrill Lynch warned against over-investment in the financial market – the value has now reached 5.6 times the US gross domestic product. Never before, however, has the market been so fractured, the BofA continued. If the S&P 500 consisted only of “tech, health care, Amazon, Google”, the price would be 4173, and if the S&P included “everything else”, the price would be 2924.
We think: In fact, a gigantic misallocation of capital concentrated in a few big tech stocks. And thus the danger of a correction increases – if something is wrong with one of the few winners – balance sheet fraud, slump in sales, political squabbling – the whole market suffers.
The Golden Cross
As always, the counter-opinion remains: The bulls have just received support from the chart analysis. The “golden cross” has been shown – this is the crossing of the 50-day line from below over the 200-day line. Historically, this is bullish for stocks, according to Lance Roberts of RealInvestmentAdvice.com. Bloomberg celebrated the event by saying, “The S&P 500 is sending a technical signal that has marked the end of every bear market in modern history.” The event has occurred 25 times in the last 50 years. However, in a few years it was also a false signal.
It’s all up to Corona
Our conclusion from all this: Much, if not everything, depends on the corona development. Should a second wave ride in the sand, the stock market will have further upside potential. We advise investors not to look at the reported cases – they are subject to diligence or political denial in the tests. In other words, a country like the US, which carries out an enormous number of tests, will be at the top of the list here; China, on the other hand, which does not publish credible data, is way behind. The only two known factors are the number of deaths in relation to the number of inhabitants. If they are reported correctly, they are the right indicator. The question remains as to how the conflict between America and China will escalate.
The Bernstein Bank is keeping an eye on it for you!
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