I came across an interesting piece yesterday on Bloomberg’s market’s live blog making a bearish case for stocks. It was well worth a read so I have condensed the piece into its main points below. This kind of piece does play into the views of those who are highly sceptical of recent stock rebounds and focused on the long term impacts of the virus.v
Reasons for bears to hold shorts
1. Despite recent falls in equity markets the major indexes still look expensive. 13 of the 20 biggest stock markets (market cap exceeding $500 billion) traded June 26 at forward p/e at least 3 points higher than at the end of 1h, 2019, but most price-to -book ratios are little changed
2. Risk assets are strongly skewed to the downside in light of point 1 above as earning will struggle to justify long term price gains.
3. Investors seem myopically focused on the short term trajectory of the pandemic rather than the long term impact
4. Global economy will take years to recover from the pandemic’s long lasting effects. Hundreds of millions have lost their jobs, sectors of the economy need re-tooling and some may not be able to re-start operations
5. Airlines, cruise ships, mall owners and tourist companies all face uncertain futures. Qantas airways is forecasting no international travel for one year and no A380 flights till 2023.
6. With PMI’s around the world being heralded as the ‘V’ shaped recovery such indexes would need several months well above 50 before they signal a full recovery
7. US GDP forecasts are for a -5.75 contraction in 2020, followed by 4.1% growth next year and 2.9% in 2022. By the end of of 2022 the US would still be behind where it was expected to be this year before COVID-19
8. US elections are set to deliver more partisan politics and division
9. US-China trade war is still bubbling away in the background
10. Assets have recovered too fast, too quickly and as company profits dwindle so will asset prices.
All about jobs
In my mind the big question is how will the job market be impacted post COVID-19. If jobs can stay for the main then the economy can limp along, but keep going. If job losses start coming in waves then the bearish case outlined above starts becoming a reality. For now fiscal and monetary stimulus is keeping the bull case going, but that can’t fight millions of job losses.