The only justification for U.S. equities to be priced at their current levels is that a major medical breakthrough to defeat the pandemic is coming sooner than later, according to David Rosenberg, who runs his own independent research firm in Toronto. Even if that happens, the economic damage inflicted by Covid-19 could take years to heal.
The equity markets are "displaying a level of hubris that is as amusing as it is disconcerting," he observed. A retesting of the March lows is likely in his opinion.
Every Thursday the new unemployment claims are announced. Over the past seven Thursdays, 33 million Americans have filed for unemployment. What has the stock market done? The Dow has risen a collective 2,000 points on those seven days.
Rosenberg is hardly the only market observer asking what planet the stock market is living on. A day after he spoke, hedge fund manager Stanley Druckenmiller said the risk-return, trade-offs for equities are about the least attractive of his lifetime. Stocks are down only about 11% from their February highs, and it is obvious the world is a lot more than 10% messed up.
Speaking for the 11th time at John Mauldin's Strategic Investment Conference, Rosenberg ticked off a litany of economic statistics illustrating the magnitude of the downturn. His presentation was entitled “The Great Repression: Business Will Not Be As Usual.”
In recent years, Mauldin has repeatedly tapped Rosie, as conference attendees know the former chief North American economist for Merrill Lynch, as the opening speaker. As he began his talk, Rosenberg began by urging virtual attendees to sit back and have a drink or two. It was only 11:00 a.m.
This time he opted not to include any charts in the presentation, since they'd probably be out of date within days. Rosenberg conceded that his confidence in anyone's predictions, including his own, were "several standard deviations below the norm."
Second-quarter U.S. GDP could be down as much as 50% as the hole keeps getting bigger and bigger. That would mean it has to surge 100% just to return to normal, he added.
Last Friday, it was announced that about 20 million Americans lost their jobs in April, taking the unemployment rate to 14.7%. Rosenberg believes the real number is about 20%—a view shared by some Trump administration officials—and could approach 30% in the next few months. What did the Dow do? It jumped 455 points.
"It's surreal," Rosenberg said. "Either the investment community thinks the Fed will go beyond [investing] in the high-yield market and buy stocks or they think it [the virus disruption] is all temporary." Most medical experts believe it will be at least one year before a vaccine is widely available.