Bennington: Beware the Bear Market Rally

Your Real Vision Daily Briefing for March 31, 2020

Real Vision’s Ash Bennington hosts Ed Harrison to discuss the continuing economic and financial impact of the coronavirus crisis.

  • You can model risk, but you can’t model uncertainty, Ash Bennington said during today’s Real Vision Daily Briefing.
  • Bennington and Real Vision’s Ed Harrison said the Goldman Sachs forecast released today is too optimistic and that the market has yet to adequately price risk.
  • Harrison said bulls who are looking at buys should be aware of the likelihood of a bear market rally and consider junk yield bonds over beaten down equities. 

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Statistical models may show promise of a rapid snapback, but the reality is we won’t recover from this kind of unprecedented economic damage overnight, Ash Bennington said on Real Vision’s Daily Briefing.

He argued that despite a relatively optimistic Goldman Sachs forecast, we just don’t have data for this kind of demand destruction, there’s no way it is all priced in, and they are likely overestimating what it looks like on the other side.

Harrison agreed, saying that because we’re in an unprecedented situation, the risk model inputs are unreliable and outlier scenarios may be much more likely than the models are suggesting. He pointed to Macy’s (M) furloughing the majority of its 130,000 workers as evidence that we may be in a bear market rally.

They both agreed that we won’t start to see the true magnitude of the downturn until May 1 and the US equity market’s 22% decline on S&P doesn’t yet reflect the impact this health crisis will have on a human or economic scale.

Harrison warned that there is still a lot of risk in equities and suggested that investors may want to wait for the longer-term effects to become more apparent before getting back into the market. 

“Would you buy a beaten down equity when you can buy the same junk yield bond for 20% IRR?” he said. “There’s a lot of risk there and you need to see some of the bankruptcies, some of the things being flushed out of the system before you leap into that.”