2 Significant Issues Facing The Bull Market Narrative
The stock market faces two significant headwinds as coronavirus cases rise, and as the Fed reduces liquidity in the banking systems.

2 Significant Issues Facing The Bull Market Narrative

June 27, 2020

STOCKS – NONE

MACRO – SPY

Mike Reading The Markets Premium Content – $35/Month or $300/Year

Stocks didn’t finish off the week in grand style, and based on the IG weekend index; the selling appears it may continue on Monday. The IG Weekend Wallstreet index has the DJI trading down another 90 basis points from Friday’s close, as or June 27 at 10:03 am ET. It certainly seems possible that there could be some continued pressure on stocks when the futures resume on Sunday night.

The coronavirus cases are now beginning to rise across the country, and this may severely damage the bull narrative of a smooth reopening.

Remember, the bull narrative has mostly been based on two factors 1) a “V” shaped recovery, and 2) a Fed liquidity-driven event. Both have serious issues right now.

The V-shaped recovery is still very much priced into the market based on the shape of the recovery in earnings estimates. The latest data from S&P Dow Jones shows just that, with earnings forecast to plunge by 30% in 20202 to $109.48, and then snap back in 2021 by 47.5% to $161.51.

This outlook will need to change; in one of two ways, earnings for 2020 will need to fall even further, or estimates for 2021 need to be pulled lower, creating a more extended recovery period. I attempt to show in this rough drawing. The reason for this is simple; states like Texas and Florida have started to walk back their reopening processes; other states will likely begin to follow as cases continue to rise.

Visit the NEW Monster Market Commentary Store For Premium Content! Get Now For $1.99

If earnings estimates for 2021 are too, then it likely means that the market will need to start repricing the possibility of that, and that likely means lower stock prices.

The other issue is that the Fed’s balance sheet has contracted for two weeks in a row.

The reason for the decline is because the Fed is reducing REPO operations. Notice, that Repo activity started to slide off the week of June 3, and stocks have steadily declined since that week. Also, notice how the market bottomed and began to recover the week after the Fed started its massive repo programs, and topped as the repo programs have slowed.

This is precisely how the Fed’s liquidity program has helped to fuel the market’s rise. This is how the Fed adds and drains liquidity from the banks. If the liquidity is declining, and should it continue to decline, it is likely to add yet another headwind to the market.

These are two pieces of the bull narrative that need to be monitored very close, especially this upcoming week.

-Mike

Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.