We are at a crossroads. The stock market has done (as usual) what most people did not expect. The S&P 500 gained back most of what it lost on the Covid crash, closing last Friday (5/8/20) only off a little more than 13% from its February 20, all-time-high (3393.52). This is after the index had collapsed more than 1200 points (-35%) at it low of March 23. This truly amazing. Another week has passed with the S&P giving up another 2.2% of the gain. Part of the pullback this week was contributed to by weakness in bank and energy stocks.
 

What to Avoid: the world according to Cramer

Jim Cramer

“In Wednesday’s episode (Mad Money), Cramer told viewers to stay away from a handful of industries that remain too risky, despite state efforts to reopen their economies after a months long lockdown to fend off the spread of the virus.

Those industries include early-stage biotechs, banks, airlines, oil companies and real estate investment trusts.” (cnbc.com)

Many of these stocks were hammered during the collapse.

Chevron (CVX $89.30)– the stock was high at $127.00, 7/25/19. It is up 75% from a panic low March 19, of $51.60. I'm not certain about Cramer’s reticence on energy stocks, at least high quality ones, considering what appears to be a real curtailment in production and world economies (including first-out-of-the-blocks China) beginning the process of turning on again. Crude (WTI) continues to march higher … up $5.00 on the week, closing at $29.65 a barrel.

J.P. Morgan (JPM $85.76) was not as fortunate as uncertainty about the hit they might take from forbearance and bad loans remains a cloud. Cramer cited an unnamed Fed official stating there might be a need for dividend cuts in the banking industry to shore up capital positions. This comment got the ball rolling downhill for the whole group. JPM traded at a $141.10 January 2 this year and was low at $76.91 March 19. At one point in its rally after the panic it traded back to $104.39. It closed today (4/15/20) at $85.75 up 11% from its march low. I’d say dividend cut might be priced in here.

My sense is we would have been seeing similar advice on the bank and energy stocks in late March when they were making their bottoms. I don’t know that for sure because a little bit of Cramer goes a long way, ergo, I don’t know what he was advising back then. I do know his comments were no help on sentiment this week.
 

The Week That Was

Jerome Powell

Sentiment was ruled by Fed Chairman Powell who told most of us again what we already know that there were still significant risks in the economy. Then there was hedge fund legend David Tepper’s pronouncement that this was the most overvalued Market he’d seen the since 1999. I’m not certain which market he was speaking of. If you are in value stocks or small cap growth you are wondering if you are investing in a stock market that is even on the same planet as Mr. Tepper. We wrapped up the week with a bad number on new applications for unemployment benefits and crummy retail sales. this brings me back to something I published April 11, 2020 (S&P 500–2789.82) — “The Crisis Abates … “;

Let me suggest at this point that most people and the market know: that Q2 is going to be awful. I would also throw out the idea that 2020 is going to be a write-off. My sense is that the worst has been priced into the market. So the bad news going forward (negative GDP growth, big jumps in unemployment, awful earnings for some companies, including much red ink) will have little negative effect on the market. The focus will shift to the positive impact of the unprecedented stimulus and monetary policy currently being applied by central banks and governments all around the world.

There is one refrain that I hear, especially from individuals, and that is that they are looking for some sort of proof that it is safe to get back in the market … better than expected GDP numbers, employment stats, etc. When the obvious signs appear it will be too late. The opportunities will be lost. The train will have already left the station.

Martin Zweig (1942-2013)

“The late Marty Zweig is credited with the saying ‘Don’t Fight the Fed’. In his book “Winning on Wall Street’, which was published in 1970, he writes “indeed, the monetary climate – primarily the trend in interest rates and Federal Reserve policy – is the dominant factor in determining the stock market’s major direction’.”

In our current situation, we not only have a ‘gale force’ “Fed” wind at our back but a huge fiscal stimulus (over three times that given during the financial crisis). On the fiscal front it even looks like there may be more to come. Call me a Pollyanna but my bet is on the Fed plus the massive fiscal response to win the day in this struggle between bullish and bearish forces in the market.

Cramer did say something in his segment that resonates with me, “You know what would save all of these troubled stocks? Bingo. A vaccine,” Cramer said. “Yet, the prospect of a vaccine seems more remote by the day.”

He’s right on one point and that is, including Cramer, there aren’t very many voices talking of the possibility of positive surprises on the vaccine front or any other area pertaining to Covid-19, surprises that might reinforce a constructive attitude on the market.
 

We may be at a crossroads

But this crossroads may have little do with our investing direction — buying, selling or holding. Tepper may have touched on the edge of it and that is valuation and the huge valuation gap that has developed between this market’s version of the “Nifty Fifty” and the great unwashed mass of stocks in the value and small cap growth category. The crossroads may be from that which has worked flawlessly in the past few years to a new investment direction. Unless ‘it’s different this time’ this will happen at some point.

What do you think?