EC Coronavirus Cure: Print More Money

A few days ago the market was crashing on Coronavirus fears. But recently, the market has soared back based upon the hopes of a vaccine and some better than expected economic data in the US. The ADP January employment report showed that a net 291k jobs were created, and the ISM Services Index came in at a healthy 55.5. However, a couple of good data points doesn't change the fact that US economic growth has contracted back to 2% trend growth and will absolutely become more anemic--at least in the short-term. This is because the measures needed to contain the virus are also GDP killers. I have no clue if the virus will become a pandemic or if it will fade away like the SARS and MERS viruses--without long-term economic damage. But, for the stock market to remain at record high valuations, nearly everything has to go perfectly. That is, the Fed has to keep pumping in money, and EPS growth must rebound sharply.

The government reported that real GDP increased by 2.1% in Q4 2018, and nominal GDP increased by 3.6%. Therefore, the BEA wants us to believe that inflation was running at an annual rate of just 1.5% in Q4 of last year. That sleight of hand caused the number to appear respectable. However, going forward, we see many corporations, some of the biggest in the world, warning about a big hit to earnings because of the ancillary effects of the virus-like closing down many major cities in China. For example, the mighty Tesla stock dropped 21% intraday on February 5th on the announcement of Model 3 delivery delays in China. This is happening in the context of the S&P 500 EPS growth that had already flatlined before the outbreak of the virus.

Looking forward to Q2, which is less than two months away, the market will have to deal with the reporting of some really bad economic data and earnings that will be much weaker than Q1. But not only this, it will also have to deal with the Fed's withdrawal from the REPO market and QE 4. This means the most overvalued stock market in history is going to have to deal with anemic data and a crimp in the monetary hose at the same time.

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Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called,  more

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Adam Reynolds 6 months ago Member's comment

If only a real #coronavirus cure was that simple!