Larry Berman

Berman's Call

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Back in February we featured COVID-19 risks to markets and wondered why the market did not care much. Back then, the fear of missing out (FOMO) based on Fed liquidity feeding markets was a significant factor. Today, I’m looking at the hope for a vaccine and wonder how exuberant the market is to get beyond COVID-19 backed by Fed liquidity and the fear of missing out.

According to an estimate from Raymond James, and many others, we should know prior to the U.S. election if we will have a viable vaccine. Some say the market will explode to the upside when we start to see efficacy results from the Phase 3 clinical trials. This is certainly a possibility, but the amount you are paying for the market today is already extreme and the reality is that it will take years to normalize economic output to pre-COVID levels even with a vaccine or viral treatments. This will likely be a drag on earnings for a few years and much of the upside of a vaccine is already priced in.

Those who say the markets are not expensive are the ones mostly just comparing the value of skimpy yields from safe government debt that central banks tell us will stay anchored to the bottom to keep the world growing. That point of view isn’t bullish. It’s frightening.

But this is the new normal and the liquidity factor is significant. I can’t emphasize enough that it’s not good that we need free money to keep the party going. That said, Apple, Amazon, Netflix, Google and Microsoft, companies that make our lives easier and more efficient, face various tax and anti-trust headwinds. When the market starts to care is a topic for another day perhaps but these headwinds grow stronger if we get a changing of the guard in Washington D.C. (more on than in a minute).

The top people in the space, that I trust, think that vaccine efficacy will tell us if this virus is going to be with us forever as part of life or whether we can develop immunity. We are just learning about the long-term damage COVID-19 is having on many people—you don’t want to get it for the simple fact that you may have the genetic risk that causes other longer-term issues. Dr. Anthony Fauci told us this week that we may have a viable vaccine by November’s U.S. election. But this will only work, much like wearing masks, if enough people take it and enough people have a good immunity response. Basically, by not doing your part and wearing a mask, you are guilty of making this far worse than it needs to be. That will likely be truer when it comes to a vaccine. And if you think the people who refuse to wear masks will take a vaccine, well, there’s a bet to make there too I would think.  

The other “what if” uncertainty that the market is not paying much, if any, attention to is the probability of a Democratic sweep in the elections that will no doubt be challenged by you know who. The high hurdle for the Dems is not the White House, it’s the Senate. They need to take over three seats if they are going to win control. Arizona seems like a lost GOP seat for sure, while Colorado, Montana, Massachusetts, Georgia and Iowa are other key races to focus on.  I expect a Dem sweep is the most likely outcome in November, but that is the minority view from a market risk perspective. Not because I want a more socialist society, not because I think it is the best outcome for the U.S. market and economy, but just because that’s what my analysis suggests. I predicted Trump would win in 2016 when all the polls said he would not. I predict a Democratic sweep because that’s what the average person needs when push comes to shove and Trump did not make America great. Addressing inequality issues will!

For me, the biggest economic issue is inequality. Trump’s policies have made it far worse. Policies to boost the stock market are not what society needs most. I’m not saying the political push left is good overall -- I lean right politically and am a small government fiscal conservative – but right now it has a better chance of lifting the bottom half up, and that’s what society needs and will likely vote for.

Which matters most for markets will be debated in the coming months. Some think the money printing and unprecedented spending and liquidity are what matters most. It matters a lot and it is inspiring the FOMO melt-up. In all the data I have looked at, I have not seen market sentiment so negative after a market rally like this. But then again, we’ve never had a global pandemic and a non-stop money printing press working at the same time.

More volatility to come is a virtual certainty.