What if the Recent Rally is Just Beginning?

Disclaimer: This post should not be taken as investment advice. It just represents the opinions and perspectives of someone who’s been in finance over two decades.

I wrote this post last week but hadn’t posted it because I wanted to edit it some more. After yesterday’s stock market drop of 6%, we may be in the middle of a pullback. But I still think the outcome discussed below is still likely.

We’ve almost come back full circle since the March 23 lows. The Nasdaq is actually near all time highs. So what happens from here? There’s a lot of technical “evidence” that we may be due for a pullback.

The put/call ratio is the lowest in many years as we’re about to hit the euphoria stage of the rally. Robinhood traders are trading as if the market only goes up. Puts are being sold at cheap prices while calls are distorted from normal trading ranges.

So you might be thinking, well, maybe this guy has seen a chart or two and it’s impacting his opinion of the market. My current best estimate of what’s happened and what’s about to happen to the market is this: The Fed, the government, the market and everyone else overestimated how impactful the Covid-19 outbreak would be to the economy. And I predict that the result of the stimulus will be a massive run up in equities not seen since the dotcom bubble.

First, the fiscal stimulus was unprecedented in scale. The one time checks plus the increase in unemployment was more than enough for most Americans, especially because everything was closed and people couldn’t spend money anymore. So you have results like this:

The savings rate was the biggest on record.

U.S. savings rate hits record 33% as coronavirus causes Americans ...

Many Americans are making more staying home than at the job they got laid off from.

Second, fed policy to purchase investment grade and high yield bonds (including some corporate bonds) stabilized the market, allowing companies to raise a record amount of debt at very attractive prices. Airbnb may have raised capital a week too early.

Third, Americans are going to do whatever they always do. A virus that has a death rate of below 1% isn’t going to stop people from living their lives. Only in America do you see people flooding casino floors with no masks on while an outbreak is still happening.

Las Vegas reopens with tourists, jackpots, and pools galore | Las ...

All this together has led to an incredible rally into stay at home stocks (video conferencing, e-commerce, video games, groceries, etc.) and then now a rally into reopening stocks (airlines, hotels, casinos, autos, etc). The stay at home stocks are holding steady while the others play catch-up. This would indicate that new money is continuing to flow into the equity markets.

Here’s why it’s happening. The fed has pumped so much money into the debt markets and there was so much money on the sidelines in money market funds that the money has to flood into equities. And let’s not forget the Robinhood day traders taking their stimulus checks to go all in.

So here’s my prediction. The markets pullback a small amount, less than 5% over the next two weeks and then rally hard breaking all time highs. Remember the fed? The $4 trillion in stimulus is 4x the size of the bailout of the Great Recession.

We have been forced into a Fed bubble. I think some participants in the market thought that we may be headed towards a Fed bubble in 2014-2015 but the valuations never got out of control. In fact, because of the tax cut, valuations have looked good since 2017.

I predict that we’re currently in a combination of 1998 and 2008/2009, where we have a drawdown, the fed intervenes and then the market rallies after that. The real economy will not recover as quickly as the equity markets and so we’re going to see some high flying valuations not seen since 2000 by the time we’re done with the rally.

The events that could facilitate this to happen include (1) a second stimulus bill to help small businesses and get back people to work, (2) Trump gets re-elected (I’m not hoping for this by the way), (3) there’s a big market rally in 2021 and continued by an infrastructure bill, (4) the economy and the market rally loses steam sometime in 2022.

Oh and there’s a Covid-19. We’ll see spikes here and there but it’ll just become part of everyday life for Americans. An effective vaccine or treatment could be discovered over the next 12 months. The market will push forward like it always does.

Happy investing to all!

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