The market appears to be at a make-or-break juncture.
Stocks rose in volatile trading Wednesday as Wall Street applauded the partial reopening of the U.S. economy. The action was mixed as bank stocks climbed, but tech-focused stay-at-home plays fell.
Market analysts and economists are largely at odds when it comes to pinpointing a timeline for recovery.
Here's what four of them said Wednesday:
A new playbook
David Lebovitz, global market strategist at J.P. Morgan Asset Management, said many questions remain about the reopening process, which is why he's staying cautious:
"We have been surprised by the speed and the magnitude at which things have moved, but when you think about building a diversified portfolio, you have the 10-year Treasury yield at 70 basis points. Equities look attractive even if they're trading at north of 20 times. So, we have been encouraging folks to stay long equities despite some of the risks that exist. I guess … where my caution really comes from is there's a lot we don't understand about reopening the economy. And there was a great article the other week where they were talking to restaurant and bar owners in New York City and basically saying, 'What kind of capacity do you need in order to break even?' and the number is somewhere around 75%. So, I think one of the things that we need to focus on is just because business can reopen, doesn't necessarily mean they will reopen. And furthermore, turning the economy back on is much more challenging than turning it off. You can basically stop this thing on a dime, but when it comes to starting back up, I think there are a lot of questions around what that's going to look like, particularly given the more services-oriented nature of this downturn. Usually, it's manufacturing that takes the majority of the pain. This time, it's services, and we just don't have a good playbook for that and I think that's part of what's informing some of the caution that we continue to have as we think about building portfolios. It really drives our focus on quality assets here at the current juncture."
Fed in focus
Mike Mayo, managing director and head of U.S. large-cap bank research at Wells Fargo Securities, said the Fed would do well to let its policies from the previous recession work:
"We've run over 200 earnings models. We've run different scenarios: a V recovery, a U recovery, an L recovery, and it's pretty tough, we think, for the government to conclude that large banks, well-capitalized banks, well-capitalized banks that earned their dividend twice over in the first quarter, in a quarter when they built reserves, we find it very tough for the Fed to conclude that banks should cut the dividends now. Remember, this is the Fed that's done a phenomenal job over the last decade. You've had a decade worth of Fed stress tests. Capital is double the level where it was during the global financial crisis. So, we say, 'Thank you, regulators. Now, let the process work.' And by the way, the Fed has a right to do a look-back. They can look back in two quarters and say, 'Whoa, we did not expect another leg down, a big second wave, some sort of depression-like scenario.' The Fed can always change their mind. But to do so at this point in time, it could sap confidence. By the way, the bond market, the $6 trillion investment-grade bond market, when it comes to banks, bank bond spreads are as safe as any other corporate."
'Long and painful slog'
Jason Furman, economic policy professor at Harvard University and former chair of the Council of Economic Advisers, warned investors not to get too eager too soon:
"I think we're going to have two phases from here. One is a partial bounce back, which will be very rapid. It'll look like we're on the upslope of a V. We've already seen that. When you look at daily data, it bottomed out … around April 15. You've even seen growth in consumption spending, a decent amount of it, from April 15 to May 15. Problem is that's the low-hanging fruit of growth where you turn the lights back on, call some of the furloughed workers back. There's a lot more people that aren't coming back to their jobs, businesses that are not going to be revived, and so once you get past that first phase, I think you're in for a long and painful slog."
'Shortest recession in history'
Keith Lerner, chief market strategist at Truist/SunTrust Advisory Services, wondered if this could be "the sharpest and shortest recession in history":
"If you look at how far the rubber band got stretched between value and growth, it became very extended, and I think this weekend changed the perception. We saw people out on the roads again. You saw hotels start more bookings and so forth. So, I do think … that there's some more room. Longer term, though, we still like some of the secular growth stories. Think about technology and health care. They just outperformed by so much that they're consolidating, but a lot of these stocks made new highs recently, and after a consolidation, we still think that's leadership. And you probably, at this point, want to have a barbell between the two, and after a consolidation, we would be looking to add to tech. … The market tends to bottom about four to five months before a recession is over, so, we might have the sharpest and shortest recession in history. And our base case for some time has been that we would start to stabilize in the economy in the summer, and it's actually happening a little bit beforehand. And let's go back to 2009. Markets bottomed in March, the recession wasn't over until the second quarter, and the first quarter of growth that we had in September was only by 1.5%. So, in some ways, the market's forward-looking. And also, going back to technology, health care and communications, those areas combined account for about 50% of the overall market, and those earnings have actually held up really well. One last thing: … [Tuesday] we saw 90% of stocks in the S&P now above their 50-day moving average[s], so, the market is broadening out, and historically, that's a very good omen when you look out one year. One year after similar signals, the market's been up, 14 out of 15 times, double digits. Again, a little bit short-term overbought, but that's a healthy signal for the overall market."
