The stock market, whether you look at the S&P 500, Dow, or Nasdaq, has been partying like its 1999.

(Source: Ploutos)

By June 6th the S&P 500 was up 45% in a 54-day rally that was the strongest sine 1933.

However, the market has absolutely gotten ahead of itself, becoming totally disconnected from pandemic, economic or earnings fundamentals.

Last week the market suffered the worst day in three months, and the 46th worst of all time with the S&P 500 falling 5.9% and the Dow 6.9%.

I monitor the pandemic, economic and earnings situation closely each week for Dividend Kings, as part of our very thorough Weekly Recession Updates which cover

• credit/financial market health (to monitor for signs of a financial crisis)
• economy/small business updates (including the weekly Census Bureau’s survey of small businesses)
• earnings/market valuation updates (including long-term expected returns out to five years)
• pandemic update: second wave risk, transmission rates in each state, vaccine progress, and global viral transmission (because global infections eventually make their way here).

This week’s update included the first second-wave models from the IHME which has both good and bad news for the US economy, corporate earnings, and the stock market.

The Data Simply Doesn’t Support A V-Shaped Recovery

There are few economists I know of that still believe in a V-shaped recovery.

Morgan Stanley on Monday updated its base case for S&P 500 growth through June 2021, citing a swift economic recovery.

The bank raised its base case for the S&P 500 to 3,350 from 3,000 through June 2021, implying a 10% jump from Friday’s close, according to a Monday note from strategists led by Mike Wilson.

“A faster re-opening than expected along with a powerful combination of fiscal an monetary stimulus all support an economic and earnings recovery,” Wilson wrote.” – Business Insider

Morgan is applying a 20X forward PE to its recently revised 2021 EPS projections which is 22% above the 25-year average of 16.4.

In fairness to Morgan JPMorgan recently penned a very bullish note about how stocks might surge 47% off Thursday’s lows because it too is expecting a rapid economic recovery.

However, so far the economic data absolutely doesn’t back up such bullishness.

(Source: New York Fed, Dallas Fed, Harvard)

Using 10 weekly/daily reports, the high-frequency indicators, the NY Fed’s Weekly Economic Index shows that we appear to have bottomed but the shape the recovery looks far more like the Congressional Budget Office’s swoosh shaped recovery.

The Fed, not just Powell but all Fed Presidents, agrees that a long recovery in which unemployment rakes until 2023 or 2024 to get back to full employment (4%) is likely.

Morgan and JPMorgan, and all very bullish analysts, are not factoring in the second wave of the virus that not just 69% of Americans expect, but so do most medical experts.

And so here is what that potentially means for your portfolio.

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