Foolish Hope Will Doom the Current Rally, Savant Says

Ahhhh, it’s just a bear market rally. You know, the temporary respite before stocks get ugly again. And research maven James Bianco says the recent climb since the March nadir will end once investors realize the news remains bleak.

“I understand the market has been up a lot since the March low,” said Bianco, president of Bianco Research. “But what I see in the market is a retracement rally that looks very similar to the first type of rallies that you get in protracted bear markets.”

And it could get worse than the previous rout, he thinks. “We’ll revisit the 2200 S&P low, if not make a lower low—probably by late summer,” he told CNBC, referring to the March 23 market nadir of 2,237. “That’s going to come because we’re going to find out now is a critical time for the market.” Meaning: Things aren’t getting back to the way they were when the economy opens up again.

Since the S&P 500’s March low point, the index is ahead 30%, which ordinarily would make this another bull market (more than 20% off the bottom). Right now, that’s driven by faith in Washington’s all-out commitment to support many corners of the economy financially, plus the hope that COVID-19 might be in retreat.

Look at what happened Wednesday. News broke that the US gross domestic product (GDP) had dropped by a scary 4.8% in the year’s first quarter. Consumer spending slid 7.5%, already-anemic business capital spending shrank for the fourth consecutive quarter, and imports and exports sank badly as international trade has ebbed.

Nevertheless, the market found a silver lining that outshone all the bleak tidings: Early findings for a drug that might shorten virus-related hospital stays were greeted with wild enthusiasm. To be sure, the poor economic results were widely expected and were likely already priced into the market. And any notion that science was en route to finding cures and vaccines is treated like holy manna.

“What the market seems to be thinking is we’re going to restart, and we’re all going to pretend that it’s 2019,” Bianco said. “And we’re all going to stand on the subway platform with 500 other people waiting for the next train.” He cautioned that a recovery will be long and slow, regardless of the gargantuan fiscal and monetary outlays to right the economy.

“We are moving to a lower growth environment, and I think the market is a little ahead of itself right now in what that means,” Bianco said. “There’s going to be more changes and more evolution that the economy is going to have to go through before we’re ready to start a full-on bull market.” And who knows? Maybe last week’s two down days, Thursday and Friday, are the start of that.

What is Bianco doing about this situation personally? He said in March he put all his assets into cash.