David Rosenberg: Investors shouldn't be so smug when policy-makers are signalling tough times
“However, it was clear to everyone on the Governing Council that this is not a normal recession.” — Bank of Canada Governor Tiff Macklem in his opening statement at the Monetary Policy Report press conference on July 15.
Note that he said “is,” not “was.” He used the present tense, not the past tense. In other words, the recession actually is ongoing, which means that, with all deference to Mrs. Dow and Mr. Jones, this remains a powerful bear market rally.
But this is not some flashy new secular bull market. Be careful out there, especially since I detect on my Twitter account a growing sense of smugness and complacency among those who claim they were brilliant enough to buy at the lows. They never boast, mind you, that they failed to see the mid-February peak and are flat on the year despite everything that U.S. Federal Reserve chair Jerome Powell and Secretary of the Treasury Steven Mnuchin have done to ignite rampant asset inflation.
“Outlooks remained highly uncertain, as contacts grappled with how long the COVID-19 pandemic would continue and the magnitude of its economic implications,” the Fed Beige Book stated on July 15.
Not just “uncertain,” but “highly uncertain.”
How fascinating that such a comment from the front lines of the economy would occur just as the S&P 500 erased all its losses for the year. After sifting through all the caveats in the Beige Book, I came to the conclusion that the bull market really should be in uncertainty. Maybe stock market participants think this is good, since elevated uncertainty means more Fed support. That has been the trade for months.
But make no mistake, the District Banks that did provide any guidance over the macro outlook didn’t provide any clarity whatsoever. Just a whole lot of concern. Here’s a sampling:
Boston: “Considerable uncertainty characterized respondents’ outlooks, as was the case in the May report.”
Philadelphia: “Modestly positive expectations for growth over the next six months have broadened among firms; however, uncertainty remains high, as contacts cite the duration of the pandemic and the depth of the ensuing recession as key unknowns.”
Atlanta: “Expectations for future production levels declined, with only one-fifth of contacts expecting higher production levels over the next six months.”
Chicago: “Contacts expressed great uncertainty about the path of consumer spending over the rest of the year, especially for the holiday season.”
Well, we now have the S&P 500 completing a round trip with the index basically flat on the year. The economy hasn’t done a V-shaped recovery, but the equity market sure has.
Remember at the lows in March, the market was pricing in a pandemic it thought was the Black Death, an endless lockdown and a severe multi-quarter recession. Right now, the market is pricing in a recovery, a recession that will be shorter than expected and one that only dented the long-run earnings profile, a better understanding that this isn’t the Black Death, and advances being made towards a vaccine (some believing this could begin later this year or early 2021).
And then there is the pledge, at least by the Fed, that policy will remain extremely accommodative and likely eased even further well into the recovery phase. That the markets could withstand the breakdown in U.S.-China relations, what has happened in Hong Kong, the renewed outbreak of the virus and the pause in re-openings, and the elevated odds that the Democrats take not just the White House but the legislative branches as well this November, is a sign that the news is not bad enough to offset the Fed and vaccine progression.
Nobody believes that in an election year we will fall off a fiscal cliff. And as far as the election goes, nobody believes that Joe Biden will really raise taxes even if he does win. And few, if anyone, care about China relations anymore. It’s all about the Fed. And it’s all about the vaccine treatment — Moderna, Pfizer, Oxford University, etc.
It goes without saying that the stock market has become completely disconnected from the economy. The rally is based on hope (just ask
White House economic adviser
Larry Kudlow), momentum and hardened views that the Fed has the ability to control all market pricing at all times. History suggests otherwise.
But insofar as the economy is concerned, the data is showing the three-month bounce off the bottom is over and the real ‘W’ is a W-shaped recession, not a W-shaped recovery.
David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. You can sign up for a free, one-month trial on