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19.05.2020 – Special Report. Follow the money: Anyone who wants to know where the journey on the stock market will take them in the future should follow Smart Money. In other words, the big, professional investors. Many of them are expecting a second sell-off wave. Both in the financial market and at Corona. We shed light on the background.

The Revenant

Bears always attack twice. The western “The Revenant” – meaning: the undead or revenant – has impressively illustrated this. In the bloodthirsty strip, a grizzly mom returns to her cubs after the first attack to check that everything is all right. And then she sets off in a second attack – but the hero kills her and survives badly injured. Maybe this is the scenario for Wall Street in the coming months.

Bearish on a three-month horizon

A bearish sentiment was just published by Deusche Bank. The verdict: The majority on Wall Street expects lower share prices in the next three months and sees a second corona wave. Between 13 and 15 May, the institute surveyed 450 professionals worldwide. In total, 55 percent of those surveyed expect a second wave of the epidemic. And 42 percent expect slightly lower stock prices in the S&P 500 – in addition to 17 percent who see the index as much lower. After all, the picture is turning on a twelve-month horizon: Accordingly, 36 percent expect the S&P 500 to be “slightly higher” and 48 percent “much higher”.

Overvaluation in the S&P 500

The analysts of even stuck a price tag on the current stock market: according to this, the fair value of the S&P 500 is 2,510 points. A brief summary of the methodology behind this statement: The experts took the average profit growth of 4.85 percent from 2012 to 2019 as a basis. And as best case profits that are no longer hit by Corona. So much for the assumption in the “better than best” scenario. But if the setbacks for corporate profits from the 2001 crisis are taken as a basis, the fair value for the S&P 500 would be 1,980 points. And if the recession following the financial crisis in 2008 is the norm, then the S&P 500 would have to slide down to 1,926 points.


Hedge fund warns of banks

David Tepper, founder, head of the hedge fund Appaloosa Management, recently played the same tune. Although he said in an interview with CNBC that the market had probably bottomed out. However, there are too many market segments that are valued optimistically – and that the stock market is facing volatile times. In fact, there are overvaluations that are higher than they have been since the dotcom bubble in 1999. For example, there are crisis winners like Amazon that are “fully valued”. But investors would be better advised to stay away from other sectors such as banks – after all, how are financial institutions supposed to make profits when the Federal Reserve is likely to keep the key interest rate at zero for years? Tepper also pointed to the risk that Donald Trump might not be re-elected – or even take up arms against China.

Amazon began the work

Investors observing bearish signals should also keep a closer eye on the commercial real estate market. Especially the shopping malls: they have been exposed to an increased danger since the strengthening of the delivery service giant Amazon. And the corona crisis has only accelerated the death of shopping malls with home office and mail delivery.
If several major players topple over here, this will also affect some banks – which brings us back to the warning we have just heard from Tepper. The keyword to watch out for when screening the news would be Commercial Mortgage-Backed Securities (CMBS) – these are securities backed by mortgages from the commercial real estate market.

Corona kills the shopping malls

The Bloomberg news agency recently reported that 167 CMBS bonds were reported as defaulting in May so far. Morgan Stanley had previously reported 68 loans in this asset class for April that had not been serviced. America’s largest shopping centres are included in the CMBX 6 index – and of these, the Crystal Mall in Waterford, Connecticut, had not paid rent in April and May 2020; there are also outstanding loans at the Louis Joliet Mall in Joliet, Illinois. The list of wavering malls can be continued. Needless to say, retail is only the forerunner of a faltering economy.

New Depression

At the end remains a gloomy vision of the blog “The Daily Reckoning”. According to this, the USA is heading for a “New Depression”. The stock market has not yet grasped the extent of the economic damage. People would save the state solidarity cheques and not spend them. Unemployment would probably not return to a tolerable level of 5 percent until 2026 or later. Companies are likely to topple over in rows. Be it because of Corona or because people are afraid of it – there is a self-fulfilling prophecy in consumer behaviour threatening. The Federal Reserve is out of ammunition – the deficit spending will lead to unexpected dimensions. Ultimately, it will lead to higher taxes and inflation. Only in 2022 will the US gross domestic product return to the 2019 level. The S&P 500 could thus easily slide to 1,870 points.

Our conclusion: If you assume that the stock market is overvalued, then you should stock up on shorts.
The Bernstein Bank wishes successful trades!

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