Wall Street’s Surprising Confidence Explained

As I type this note, 9pm-ish on Saturday 3/7/2020, the news surrounding COVID-19 points to yet more pain for the stock market come Monday morning.

Despite the swiftness of the current correction, what I gather from much of Wall Street’s punditry is that recession odds remain low, and that the latest stock market action will ultimately resolve into just another correction amid the longest bull run in history.

Frankly, while we’re not in recession yet, I’m dumbfounded by Wall Street’s sanguine outlook. I’m sure I don’t need to list for you the utter global plethora of halts, closures, cancellations, postponements and cutbacks of economically-impacting activity.

So what gives? I mean, besides having skin in the bull market game, what on Earth has Wall Street not sounding the alarm on the obvious: That being the risk that the global economy falling into recession, and, thus, the stock market into the next bear market, amid present circumstances is notably high?

Well, beyond its obvious recency-bias affliction, and perpetual love affair with stocks, Wall Street believes big time in monetary and fiscal stimulus — despite all of the powers-that-be’s best efforts at the onset of the last two epoch bear markets. And, make no mistake, there are bazookas to be fired soon from both cannons.

On top of the virtual assurance that another .50% rate cut will come from the upcoming March Fed policy meeting, expect very soon to hear of fiscal stimulus plans that are likely to receive fast-track approval from Congress. The latter being of the size and scope that very well could inspire strong snap back rallies in global stock markets.

In a nutshell, I have little doubt that Wall Street at large fully expects to see stocks stage a major, stimulus-induced comeback in the coming weeks, hence its present sanguinity. 

As for me, I too expect the market to instantly welcome the stimulus to come, when it comes (degree and duration of would-be rally is the question). However — while I’ll remain open to all possibilities — I don’t share Wall Street’s confidence that money printing, interest rate suppression and massive government spending will culminate in the sort of healthy economic activity that can gather sustainable momentum and usher in an all new period of growth and prosperity — not at this stage of the cycle. 

The best they can do, in my opinion, is extend the present cycle a bit further and, frankly, in the process make for a much messier recession when further-inflated asset bubbles finally burst. Thus, we’ll need real evidence of fundamentally-meaningful progress (as opposed to sharp rallies in stock prices) before we reengage portfolios in the kind of growthy asset mix that reflects healthy bull market conditions.

Speaking of bubbles, the energy sector occupies no small portion of the existing high-yield debt mess we’ve been warning about for months; today’s news that the Saudi’s are set to punish Russia’s lack of cooperation by ramping up production, and, thus, pounding the price lower will no doubt apply pressure where it’s presently least welcome. Further inspiring what will surely be a massive spending bill, but perhaps not before the stock market takes out a lower support level or two…

Stay tuned…


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