Despite a minor sell-off on Friday, stocks have rebounded from the coronavirus recession strongly in recent months—too strongly, according to research from Vital Knowledge founder Adam Crisafulli, who believes investors are too optimistic about a quick economic recovery and the market is now overvalued.
The market remains “incredibly resilient,” with the S&P 500 still up around 2% last week despite more negative headlines about a resurgence of coronavirus cases. The default setting for most investors is still to “buy the dip” whenever the market falls, according to Crisafulli, while “FOMO” remains a major theme as well—with many investors fearing they’ll miss out on the stock market’s rebound over the past few months (The S&P is up nearly 40% from its coronavirus recession low point on March 23).
Stimulus from the Federal Reserve, which injected nearly $3 trillion into financial markets since late February, has been instrumental in helping the stock market move higher by providing assurance to investors that the Central Bank will continue to shore up the economy.
Hopes for more government stimulus, namely a Phase 4 coronavirus relief bill from Congress, have also helped boost stocks, he says.But Crisafulli maintains his forecast for the S&P 500’s fair value at 2,900 (around 6% lower than current levels) arguing recent economic and corporate news have a positive bias: Following the economic collapse in March and April, it’s “easy for conditions to see week-to-week or month-to-month improvements.”
“Investors are extrapolating this bounce in activity to a full V-shaped recovery, not paying nearly enough attention to the enormous permanent damage wrought by COVID,” Crisafulli warns.
“The threshold to spark a wave of buying is miniscule (recycled news, higher analyst price targets, etc.) while the bar to spur selling is extremely high,” Crisafulli said in a recent note.
What to watch for
“While it’s unlikely politicians reimplement lockdown measures, all the negative press around the coronavirus will stunt the economic normalization process,” Crisafulli warns. That will further delay the time it takes for consumer behavior—and therefore economic growth and corporate earnings—to return to pre-crisis levels.
Over the past few months, stocks have largely continued to rally on optimism about reopening the economy. But more recently, the market is now taking a sizable hit amid rising concerns over a resurgence of coronavirus, with many U.S. states reopening now seeing a spike in new cases. Expectations for a quick economic recovery are dwindling: On June 10, the Federal Reserve provided a grim update on the economy. The Central Bank forecasted unemployment will remain high for years and said interest rates will stay near zero until at least 2022.