Last year there was much written about the bull market that everyone hates. April saw the rally that everyone hates. April saw the S&P 500 jump 12% to have its best month since 1987 and the third best month since WWII.

There is little case for optimism though. Although earning have come in from a number of companies for the first quarter, the real lockdown only started to take effect at the end of the quarter. With the free fall in shares, banks were able to make gains from trading and commissions but other sectors like entertainment and restaurants were totally obliterated. I was actually quite surprised to see quarterly GDP fall by only 1.2%. I was not surprised to see media outlets annualize this figure to -4.8% to make it more dramatic. This is a useless exercise to try and grab your attention with higher numbers. Expect the numbers to be much worse for the second quarter that we are only a third of the way through.

Unemployment looks set to top the figures seen during the Great Depression. 30.3 million people have filed for unemployment in the last 6 weeks. Add that to the 5.8 million before the corona stoppages and maybe even the 8 million that some economists think are not yet counted and you have an unemployment rate of 27.2%. That is assuming you have 162 million people working or actively looking for work which is set to drop.

The crisis is really showcasing the vulnerabilities in the US and Western systems for that matter. In the US in particular, it has exposed weak leadership, stifling bureaucracy, an inefficient and unfair healthcare system, lack of a cohesive permanent safety net and the uncomfortable truth that maybe more than a third of all workers in the US are low wage, unstable work that will bear the brunt of this recession.

My Argument for Why We Haven’t Seen the Bottom

• We have barely seen the shakeout in terms of earnings and have a lot of uncertainty left in terms of where it would go. Some estimate that earnings could fall as much as 30% or more for the index. There is usually a multiple compression in a beat market as well. What that means is that the current 20.88 times earnings multiple may fall as well as the profits. If this is the case, earnings falling to $100 and a multiple of 18 would put the index at 1,800, a fall of about another 38% from its current level

Source: multpl

• According to analysts at Bank of America, no bear market has hit its bottom within 6 months of the entering this phase. That isn’t to say that it couldn’t happen this time, but so still believe it isn’t likely. I would argue to say that commentators like Lance Roberts of Seeking Alpha are a little closer in terms of where we are in regards to this bear market. There is just too much uncertainty in terms of the economic outlook at this point and uncertainty doesn’t bode well for stocks. He argues that bear markets have 3 distinct phases: the initial shock drop, the bear rally and then the long drawn out downward trend. Given the coming drop in earnings and continued uncertainty, I would argue we are only in phase 2 of his chart below. Add to this the uncertainty of when a potential vaccine could come and I would argue that you are looking out to at least another 6 months to a year before a potential bottom starts to emerge. Again, this is just a guess but follows the logic of increased uncertainty and economic turbulence.

Source: Lance Roberts, Seeking Alpha

• Not now, but down the road, taxes could start to become an issue. Paying down the emergency funds we have used for this crisis, the election of a democratic president and maybe even a democratic congress in control, coupled with a greater demand by vulnerable workers for more state protection could drastically change the outlook for corporate and individual taxes. Markets middle through this but do not like it, it reduces earnings for both companies and investors.

• Keep in mind as well, we are seeing a global recession. China is not fully back to normal and depends on the US consumer. Europe is in likely just as bad a situation, just with worse demographics piled on top of that. Latin America is either engulfed in social upheaval or populist parties that exacerbate the situation. India and Africa aren’t major enough players to save the rest of us at this point and India is on lockdown anyway. This is truly unique even compared to the crisis of 2008-2009. With more than a third of earnings in the S&P also coming from overseas, the immediate future is not looking bright.

• Don’t think that tech companies will be immune. In addition to lower aggregate demand, three quarters of H1-B workers, immigrants with specialized skills, work for tech companies and many of them cannot stay in the country if not working for more than 60 days. If these workers are furloughed too long then they could leave the country all together, contributing to a brain drain. If companies have to choose between furloughing a local or foreigner and keep the foreigner based on this, they open themselves up to discrimination suits.

Change is on the Horizon

Besides the debt, the huge numbers of unemployed and worrying about a vaccine, the one wild card that may really take a toll on earnings in the medium to long term is the potential for more radical social change due to this pandemic. As I mentioned, all the flaws in the system here in the US have been laid bare and there will likely be increased demand for more fair access to healthcare and a stronger social safety net. This will involve higher taxes. These taxes may come at a time when we are just struggling to emerge from the pandemic and could hobble a recovery if not done right.

The question heavily influencing this factor is going to be how many people will remain unemployed in the longer term. The more that are unemployed for long periods, the greater the chances are for ever more angry and populist social upheaval there is.

Continuing the populist trend and mitigating the risk of another pandemic cutting off supply lines, we will likely see more on-shoring of supply lines. This isn’t always good news for workers here. This concept already had momentum due to automation advances and the tarde war. Supply chains may start to come back to the US but that doesn’t mean they will bring as many jobs. If it does involve jobs, it could end up making all of us a little bit poorer with higher prices for goods with more expensive domestic components.

Real estate is going to accelerate and shift which will have a profound impact on the industry. Companies, especially those that employ many workers with the ability to telecommute, will realize they may not need all of the real estate they are using. This doesn’t just affect prices for commercial real estate and building within cities. If people have more flexible schedules and come to work less often, they could also likely comfortably live further away. This could produce the opposite effect that we have seen in the last 20 years where large cities are drawing in workers and seeing real estate values climb. There could be a renewed interest in larger and more suburban dwellings far away from city centers.

Even our mental health could become more important. Many resort to drinking alcohol to deal with their stress and there has been a big uptick in alcohol sales since the same period last year. In the case of hard alcohol, sales are up 75% from this same period last year. This doesn’t mean your going to see me write a glowing post on the outlook for the spirits industry. If people are coping with alcohol, many are also coping with drugs since many people look for the same escapes in their preferred method of doing so, whether it be legal or illegal. The root of this is likely that people are not confronting many of the issues that lead to conflict and stress in their life, whether it is family issues, depression, or unhappiness with their work. Any of these can lead to people to look for an escape to take them away from the reality they don’t want to confront in the form of alcohol. I know because I have been there myself and only after dramatically slowing down and stopping drinking for periods of time, did I realize these emotions were what we’re driving me to drink.

It Doesn’t Have to be all Dark

Even though my focus is the markets and economics, I also like to stress the positivity and optimistic view we can take in any situation. You don’t have to be stuck at home drinking, you can rather refocus the energy on learning a new skill. Bear markets can teach those novice investors more than 10 years of gains if you manage to stay in the game. Even unemployment can be beneficial if handled in a positive manner. It can humble you and make you appreciate all that you have. Maybe having to rely on someone else will make you more empathetic in the future towards those who need a helping hand. Although the bear market bounce may preceded more pain, we can all use this situation as an opportunity rather than letting it beat us down.

The information provided by www.cashchronicles.com is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs. www.cashchronicles.com does not make any guarantee or other promise as to any results that may be obtained from using our content. No one should make any tax or investment decision without first consulting his or her own financial advisor or accountant and conducting his or her own research and due diligence. To the maximum extent permitted by law, www.cashchronicles.com disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses. Content contained on or made available through the website is not intended to and does not constitute legal advice or investment advice and no attorney-client relationship is formed. Your use of the information on the website or materials linked from the Web is at your own risk.