Is resistance to the rally therefore coming from people living in financial centers who are projecting their experience of the virus on to other areas? I received that suggestion from Brian Alexander of Cypress Capital Management in Vancouver: 

I know you can’t travel right now, but honestly if you were able to get out of NYC, you would see that much of the world is coping reasonably well.  This is not to gloat or brag as we may have just gotten lucky, but I think much of the media is myopically focusing on NYC and London, which is not reflective of the rest of the world.

In my little neck of the woods—schools are open, restaurants are open with limited capacity as are gyms, stores and pretty much everything else as well. People wear masks when physical distancing is not possible, but other than that you wouldn’t notice much.  Basically any indoor gathering of more than 50 people is a no-go, but that is it.  Construction never stopped.  We weren’t quite as lax as Sweden, but pretty close.

My point is that while the job losses are real, they may well be temporary as people outside of COVID-19 hotspots will not be terrified to leave their homes for long periods of time as the economy opens back up. Residents of Vancouver certainly don’t appear worried to go out and spend.

Much money is controlled by people living outside of Covid hotspots. While I am suitably envious of anyone who gets to live in Vancouver at the best of times, people in such places may be underestimating the risks of what is to come based on their experience to date (just as New Yorkers and Londoners may be overestimating it).  

The Spanish flu of 1918, which came in three waves, has framed the discussion of a deeper wave to follow. The following chart, of deaths in the U.S. in 1918 and 1919, is from the Center for Disease Control’s website on the history of pandemics

If this pandemic follows the same pattern, a V-shaped recovery isn’t going to happen. If a large chunk of people living in Covid-19 hotspots really are mentally exaggerating the possibility that this happens again (and we effectively have a sample size of one for pandemics of equivalent scope in modern history, so the evidence for a second wave isn’t overwhelming), then this rally could indeed be built on stronger foundations than it looks. 

So, What Should We Do About It?
The strategy laid out by Ben Inker of Boston-based fund manger GMO LLC in the latest What Goes Up podcast is one that should be taken seriously.  Another person who finds it hard to swallow the extreme disconnect between the market and the situation on the streets, he suggests taking a long position in value stocks and balancing it by going short the S&P 500. The logic is that at this point value is likely to outperform in any circumstances. If the V-shaped recovery comes true, then value stocks could rally powerfully. If not, they have sold off so much already that they have less far to fall. 

Value has done horrendously compared to the main S&P 500 over the last 12 months, as the following chart shows. Meanwhile, value stocks’ underperformance of the hot Internet stocks in the NYSE Fang+ index has been abysmal:

Does this mean there is a case for shorting the FANGs? History suggests that buying the largest stocks in an index is usually not a good idea. Such stocks have nowhere to go but down, in relative terms. If markets or technology don’t bring them down to size, then the issue becomes whether politicians and regulators will.