The stock market’s recent behavior has been nothing less than spectacular and one for the record books.

The market rebound that got underway in March last year still continues, with all the major indexes at or near record levels. Helping the stock market’s momentum is optimism about the vaccination effort and notable improvement in the economic picture, with the latest economic reading showing the U.S. economy growing at +6.4% in Q1.

But there are those with less optimism about the outlook given the ongoing resurgence in infection levels and slow-moving vaccination effort in many parts of the world that are allowing new strains of the virus to take hold. There are worries about inflation as well, with many in the market fearing a resurgence of pricing pressures in response to expansive fiscal measures forcing the Fed’s hands to tighten policy sooner than currently expected.

The interplay of these competing views will determine how the market in the coming months and quarters. To that end, let’s examine the landscape of bullish and bearish arguments to help you make up your own mind.

Let's talk about the Bull case first. 

An Accelerating Recovery: 

The pandemic dealt the U.S. economy a severe blow whose effects will likely linger for a while, particularly for some parts of the economy. But the markets correctly saw through to the fact that the U.S. economy entered the downturn in the best possible shape, with household and business confidence at near record levels on the back of a multi-decade low unemployment rate, rising wages and record corporate profits.

The recovery got underway with a record rebound in Q3 last year that continued in the last quarter of the year, albeit at a slower pace. While pockets of severe pain still remain, the momentum of the economic can be gauged from the fact that the U.S. GDP is now just a hair below its pre-Covid level.

There is actually a group of economic forecasters that sees current 2021 consensus GDP growth forecasts underestimating the full extent of the rebound in activity levels as the vaccination effort reaches a critical mass this Spring and beyond. This group of forecasters expects growth to be significantly above what is imbedded in consensus projections.

Unprecedented Policy Response

The Biden administration’s infrastructure plan has not been passed yet, but it is another sign of the extraordinary fiscal measures that have been in place since the start of the pandemic. The recently enacted $1.9 trillion Covid relief package came on top of the big fiscal and monetary measures put in place last year.

These measures helped replace lost wages for workers, assisted small businesses in staying open and staved off solvency issues in industries hit hard by the pandemic.

The new relief measures will not only sustain and strengthen the existing supports, but also facilitate the ongoing vaccination effort that promises to put the pandemic behind us.

Strong Banks Mean Smooth Recovery

Regulatory reforms instituted after the global financial crisis ensured that the U.S. banking sector was in rude health as the pandemic arrived.

Banks’ profitability suffered a severe blow as they built up reserve cushions in the first two quarters of 2020. But as the group’s strong Q1 results show, they have started to release those reserves already as they can see light beyond the pandemic tunnel.

Banks are the lifeblood of the economy as they ensure the efficient transmission of capital to different economic actors. The successful implementation of the small-business relief program, which was a key part of the earlier fiscal relief measures and was also included in the newly enacted $1.9 trillion relief bill, has been possible only because of the health of the banking sector.  

The Fed continues to reiterate that its monetary policy stance remains favorable and supportive of the market. What this means is that it will continue to keep interest rates and overall financial conditions supportive of stocks for the foreseeable future.  

Let's see what the Bears have to say in response. 

Market Complacency about Economic Recovery

The stock market’s rebound from last year’s March lows that got a fresh boost from favorable vaccine announcements reflected a best-case scenario for the U.S. economy. The economy has enjoyed a strong rebound, as Thursday’s +6.4% Q1 GDP growth rate shows, with estimates of even higher growth in Q2. But it is hard to sustain that level of growth without stoking inflationary pressures.  

There is understandable optimism about the vaccine rollout, with most projections assuming an almost normal operating environment in the second half of the year. This is likely no more than wishful thinking, given the pathogen’s ability to mutate into something that is less vulnerable to the existing cures.

A realistic read of the vaccination effort will also need to keep in mind the not-so-small segment of the population that will be less-than-forthcoming in submitting to the jabs and what effect that will have on our ability to reach the so-called herd immunity.

We should also not lose sight of the fact that the U.S. vaccination effort is among the most successful ones globally, with most parts of the world way behind in vaccinating their populations.

The recovery has gotten underway, but it will likely be slower and more drawn out than many in the market are banking on.