E Why The Current Equity Rally Is Unsustainable

The S&P 500 has rallied 32% since bottoming on March 23rd, mainly thanks to the unprecedented levels of both fiscal and monetary stimulus. Optimism surrounding economic reopening and potentially successful vaccine & drug treatment discoveries has also helped propel stock prices higher over the past few weeks. However, there are plenty of reasons to believe that this is a bear market rally as opposed to the start of a new bull market, and investors should resist the urge to buy into this rally due to ‘Fear Of Missing Out’.

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Record stimulus is not a magic bullet

While the record stimulus measures globally may help alleviate liquidity and solvency problems to a certain extent in the short-term, we are inevitably confronted with a massive debt crisis worldwide. In terms of Corporate America, both small and large businesses will have high debt levels to repay once this pandemic passes amid a fragile national/global economy. Hence in the face of mass debt repayments, businesses are likely to be more financially conservative and cautious in terms of re-hiring workers.

In fact, various businesses are already filing for bankruptcy, demonstrating that regardless of the record stimulus efforts, not all businesses and jobs will be saved. Zombie companies, those with little/no revenue and high debt levels, employ about 2.2 million Americans. Hence, if these vulnerable companies go under, that would be a lot of job losses (that were perhaps keeping the unemployment rate artificially low prior to this crisis).

Many jobs that have been lost are likely to be permanent, not only due to bankruptcies, but also due to companies reorganizing in the post-pandemic era. In fact, the rate at which companies are embracing digitalization and artificial intelligence has been accelerating amid the pandemic, as they seek to become more cost-effective, productive and less-dependent on people. Automation was already expected to eliminate many jobs over the years to come, though the pandemic has given this trend an extra boost, putting many people’s jobs in jeopardy in a very sudden manner, such as in the call center industry.

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Mohit Oberoi 4 days ago Contributor's comment

You can bet against fundamentals but when central banks and governments in a "whatever it takes moment" who cares about fundamantals.

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Angry Old Lady 4 days ago Member's comment

Luckily there are a lot of dumb investors out there. Only those who are smart enough to be on TalkMarkets know better ;-)

Barry Glassman 6 days ago Member's comment

How long do you think it will take to recover once the pandemic does officially end?

Sankalp Soni 6 days ago Author's comment

Ultimately it depends on how effectively governments are able to respond. But I believe the recovery will take at least until 2022.