People are a little nuts about vaccines and the virus. This has been true for a while, but it is still true.
Anytime I mention vaccines in The Daily Dirtnap, my inbox fills up with hate mail, and I am not some anti-science ogre. I was one of the first people to get the jab last February. But people are touchy about this stuff. Y’all need to relax.
Anyway, you cannot talk about the stock market without talking about vaccines and the virus. The value/inflation/re-opening trade remains a never-ending headache. I am even hearing chatter about new lockdowns on Twitter.
The doomsday scenario is that the delta variant turns into the epsilon variant, which turns into the omicron variant, and then the xi variant, and we’ll have rolling lockdowns for the next 10 years.
A Thought Experiment: If That Happened, What Would The Stock Market Do?
Well, in the first iteration of the coronavirus, the Fed poured liquidity into the economy, and the government handed out free cash, which resulted in stocks climbing 100% from the lows last March.
If you continue that train of thought a little bit, you might conclude that the virus is not bad for business. In the short term it is, but in the long term, it’s not. Extreme fiscal and monetary policy measures tend to be good for stocks, not bad.
So here is my thesis, which we will discuss in a little more detail. Once we get past the delta variant, whatever that looks like, it will result in a stock market boom perhaps half as large as the one we had last year.
That might seem unlikely right now, as the indices are treading water. But if you look at a short-term chart of the SPX, it looks like a chart that is waiting to explode higher.
Of course, we’re not really interested in what the index does because the index is dominated by humongous tech companies. I’m not interested in the S&P 500. I’m interested in the S&P 490.
Remember last year, when, if you didn’t own the big tech companies, you were massively underperforming the index? That is about to change. I am uncertain of the timing.
Let’s Think Through This
These were the last few bear markets in stocks:
• 2020: Coronavirus (a short panic)
• 2011: European debt crisis (barely 20%)
• 2008: Real estate
• 2000: Dotcom bust
• 1991: Real estate
• 1987: Crash (a one-day phenomenon)
• Early 1980s: Interest rates
I am leaving out the LTCM crisis of 1998, which, basically, only lasted a day.
Now, the conventional wisdom around bear markets is that we cannot conceive of what would cause a bear market in advance. It is a black swan.
Is that true?