The stock market, before Wednesday, rallied strongly as the coronavirus curve flattened. Imagine, now, the magnitude of the rally if the coronavirus were vanquished.
President Trump has said that, due to pent-up demand, the economy will eventually “pop back like nobody’s ever seen before.”
Regardless of your political views, it’s worth reviewing that scenario.
At The Arora Report we conduct scenario analysis. That is a reason we were able to, on Jan. 22, identify a potential drop in the stock market due to the coronavirus.
And now, in our analysis, there is a reasonable probability that the U.S. stock market may see the biggest rally ever post-coronavirus.
Many investors are asking if they should they jump all-in. The answer is “no” because the current rally is about 65% due to a short-squeeze. For details, please see “Wall Street wants you to believe everything is peachy.”
There are seven reasons for a potential rally in the U.S. stock market:
1. Stocks compete with bonds. The Federal Reserve is likely to keep interest rates low for a long time. As of this writing, the 10-year Treasury yield is 0.647%. This is equivalent to a price-to-earnings (P/E) ratio of 155 — many multiples of the S&P 500 stock index. As a result, the stock market will see a significant multiple expansion.
2. History tells us that when the Fed increases its balance sheet, a big part of the money that it prints ends up going into the stock market. Our analysis is that by the time this is all said and done, the Fed’s balance sheet will be $6 trillion-$8 trillion. That is an unprecedented amount.
3. The U.S. economy is about 70% consumer-based. Consumers will produce never-before-seen pent-up demand for traveling, eating at restaurants, going shopping, going to the movies, etc.
4. A mother-of-all short-squeezes will take place as bearish investors get burned.
5. There will be a reconfiguration of supply chains with less globalization. This will unleash a torrent of capital spending.
6. By the time the coronavirus is defeated, there will be unprecedented monetary stimulus. We are already seeing how the U.S. government is spending money — some workers will get more in unemployment insurance than they were making in their jobs, retirees who suffered no losses due to the coronavirus are getting stimulus checks, rich hedge funds are taking advantage of the programs meant for small businesses, and so on. Ultimately, a part of this money will flow into the stock market.
7. With interest rates so low, many retirees will be forced into the stock market to generate income for living expenses.
What charts are saying
I’d like to review two charts for a window into the stock market.
Please click here for an annotated chart of the SPDR Dow Jones Industrial Average ETF DIA, which tracks the Dow Jones Industrial Average DJIA.
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