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Where have all the bears gone?

by Timothy Straiton
Friday 29th May 2020

Where have all the bears gone?

Spring is in the air, the snow has melted and one would have thought that even the sleepiest bear would be well out of hibernation. But listen…. Do you hear the faint rumbling of bull hoofs in the distance, stampeding to the slaughterhouse?  No bear could have imagined such a welcome scenario in his wildest dreams. However, time is running out and all those cheap equity put options and bearish geared equity ETFs will soon have vanished from the counters.

While the bulls are clearly betting on a quick recovery, the potential for disappointment is correspondingly large. If the economic recovery does not go like a V, but like a U or even an L-shape - so make sure you’re close to the exit.

With the gradual ramp-up of economies around the world, the corona-related supply shock is overcome. The crucial questions now are: "How will consumers behave?" And: "How quickly will the demand shock be overcome?" It doesn't look rosy here either. It is obvious that people who have just been sent on short-time work or even have to fear for their job will not be contemplating buying a new car.

The 500 largest listed US companies earned 15 percent less in the first quarter of the current year than in 2019. Nevertheless, the S&P 500 is only 10 percent below its pre-crisis level. In Europe, profits have collapsed even more. It is foreseeable that the results in the second quarter will be even worse because the greater part of the shutdown took place here. In other words, stocks have become more expensive - even though the economy is in recession.

It looks even bleaker in the United States. Hundreds of thousands of Americans lose their jobs every day, and a total of 41 million have lost their jobs - at least temporarily - since the pandemic began. Chevron and Boeing have just announced they will fire ten percent of their workforce. The unemployment rate has rocketed through the roof within a few weeks. According to analysts, it should be more than 20 percent in May. In February the rate was still 3.5 percent. This is fatal for a country whose economy thrives on 70 percent of consumption.

Another risk to the recovery - and with it the financial markets - is that the trade dispute between the United States and China will flare up again. There are indications that US President Donald Trump will boil the conflict in the election campaign again. Further punitive tariffs for imports from China and other countries would then lead to higher prices and further dampen the buying mood of US consumers. Then if Wall Street went down on its knees, the US stock exchanges would no doubt pull down the other trading venues in the world.

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