Tuesday, February 18, 2020
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Wall Street struggles to find a bear case for stocks
The stock market has started 2020 a lot like it ended 2019: on a tear.
Despite early-year worries over rising tensions in the Middle East and the recent outbreak of the coronavirus and still-unknown knock-on effects from the effective shutdown of China’s economy, stocks last week powered to record highs.
And this market action has led some Wall Street strategists to more or less conclude that right now, it is hard to build a credible bear case.
“We've postulated that the most compelling bull case right now is that there is no credible bear case at the moment, especially with evidence mounting that global economic momentum is improving — virus disruption aside,” wrote David Lefkowitz and the equity strategy team at UBS Wealth Management in a note published Thursday.
Lefkowitz notes that the firm previously highlighted an extended manufacturing growth patch, elevated valuations, higher interest rates, political risks, and a change in the Fed’s balance sheet expansion as potential risks to the outlook. Adding that, “invariably, the market will start to worry.”
And this was all written before the coronavirus became the most present risk to the global economy.
Nevertheless, the market has persisted.
On Friday, Michael Hartnett at Bank of America Global Research wrote, “We stay ‘irrationally bullish’ in [the first quarter].”
Hartnett notes that investors aren’t euphoric, he argues the Fed is caught in a liquidity trap, and he expects the “rising probability of a ‘Minsky moment’ to coincide with peak positioning & peak liquidity in Q2 triggering [a] ‘big top’ in risk assets.”
In other words: things are going to get a lot more bullish before they get bearish.
And so it seems the best bear case Wall Street has right now is that investors could get a lot more bullish and that that would be bearish.
But the most recent periods of weakness in the stock market have revolved around negative reactions to ad hoc trade policy announcements by the President and slow increases in interest rates by the Federal Reserve.
And investor sentiment, as has been the case for almost all of the post-crisis period, has remained notably subdued and money has consistently moved out of the stock market during this rally. Meanwhile, some strategists have even posited that the U.S. stock market has become a “safety trade” amid worries about coronavirus, political uncertainty, and the traditional host of market concerns.
And, yes, reversals in sentiment can be violent and happen quickly. But it’s a tough environment for the bears almost any way you look at it.
At least for right now.
What to watch today
8:30 a.m. ET: Empire Manufacturing, February (5.0 expected, 4.8 in January)
10 a.m. ET: NAHB Housing Market Index, February (75 expected, 75 in January)
4 p.m. ET: Net Long-term TIC Flows, December ($22.9 billion in November); Total Net TIC Flows, December ($73.1 billion in November)
Other notable reports: Advance Auto Parts (AAP)
HSBC to axe 35,000 jobs as profit slumps [Yahoo Finance UK]
YAHOO FINANCE HIGHLIGHTS