Pal: The Stock Market Top May Be In

Your Real Vision Daily Briefing for June 12, 2020

Senior editor Ash Bennington joins Real Vision managing editor Ed Harrison to discuss a day of “risk on risk off” on Wall Street.

  • Yesterday’s selloff may have been the beginning of a phase shift in the market.
  • As we try to make sense of the markets and figure out whether the rally has ended, fundamentals matter more than ever.
  • The market has played itself into a corner where there’s not a lot of upside but a whole lot of downside.

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Yesterday’s stock market rout may be the shift that many Real Vision experts have long been anticipating, CEO Raoul Pal said during today’s Daily Briefing.

Pal said the euphoria in equities is too big a disconnect from what’s happening in other parts of the economy. He’s been on alert for what he calls the insolvency phase of the crisis and said that bond markets not agreeing with the equity markets is always a flashing sign.

While it has been remarkable to see retail investors driving up bankrupt stocks in the middle of 20% unemployment, the madness of crowds can only last so long and it is all the more reason to pay attention to fundamentals. 

Pal said we’re currently in a window of vulnerability between bad news coming in on the virus front, stimulus programs ending, unemployment, and other issues. There’s a lot happening between now and September and it is all couched in uncertainty.

With politics and epidemiology so volatile, so many possible outcomes, and most of those outcomes fat-tailed to the negative side, the market may have played itself into a corner where there’s not a lot of upside but a whole lot of downside.

For example, if infections spike, it’s unlikely we’ll see widespread lockdowns again, but Pal warned that even a more localized lockdown creates behavioral change on the margin of the entire population, which could see GDP growth fall and increase the risk of a solvency event and a longstanding recession. Most recessions (and most pandemics, for that matter) last about two years, so it may be unwise to think this one will be any less.

Can the Fed prop up the market forever? What is the limit of this? Is there no limit? Pal said he thinks we’ll find out in the next three years.

In the meantime, he thinks the top of the stock market may be in, it’s highly likely that over the next three months yields will go to zero or negative, and it’s about 50/50 that the dollar low is in. Could this be a three-month phase shift? Possibly. Could it be longer? Probably, he said.