Pork Barrel Rally

We are getting that big oversold bounce which many have been waiting for.  From an overnight low of 2174 on Monday to an overnight high of 2498 on Wednesday.  324 point range in 2 days, which is 15%.  These enormous moves are coming as the  economic realities collide with  monetary and fiscal stimulus to create confusion among investors.  Wow, did Congress put in a lot of pork in that bill, and $500B of an opaque slush fund for who knows what. 


With the $2 trillion pork barrel fiscal stimulus package out of the way, it is actually safer now to sell short, because one of the biggest positive catalysts is in the rear view mirror.  Sure, there will be more fiscal stimulus, but its going to take at least another few weeks before that happens.  That gives bears a lot of runway to run wild in this market.  The fundamentals have deteriorated much more than investors believe.  The consensus that I hear is that the coronavirus economic shock will last 2 quarters and then GDP growth will go up huge as the pent up demand drives the economy later this year. 

I disagree with that consensus.  I don't believe the pent up demand will be all that great, sure, there will be more savings built up this year as consumers aren't spending, and that is a source of potential growth, but a lot of that will be used to pay down debt.  And that savings is likely to be used much later than people think. 

If I had to choose an academic to trade, the last group I would pick would be the economists.  One of the first I would choose would be the psychologists.  Because a lot of what moves the stock market and the economy is psychology.  If you see how much of a panic a large portion of the population is in right now, you will understand that they will not be quick to spend their savings when they've just been laid off or had their businesses closed.  Sure, eventually they will get back to normal spending habits, but it will take a lot longer than 6 months, more like 18-24 months based on previous recessions, and this is much more severe than any we've had before, so it will likely take even longer. 

Another thing investors are overlooking amidst all the money printing and fiscal stimulus is the valuations of US stocks.  Stocks are not cheap.  We are in the midst of the worst economy in 90 years and the market is still priced as if things will get right back to normal.  

I am reading a lot of articles and comments on Twitter about how this is a generational buying opportunity.  I don't know if I am the one who is taking crazy pills, but the Price to Book and Price to Sales ratios are higher than they were from anywhere between 2008 and 2013.  So for a full 5 years, valuations were lower than they are now.  Recency bias with the massive overvaluation post Trump tax cuts skews peoples' perceptions of value.  And I don't buy that because Treasury yields are lower, valuations should be much higher.  If that was the case, Europe and Japan should be the most expensive markets in the world. 

I would urge caution buying after rallies, I don't see a sustained bounce until we see more capitulation.  Just not seeing it right now.