Thinking About A Non-Apocalyptic Future – Ten 2H20 Surprises

The doomsayers are out there along with the scary headlines, especially after investors have already experienced the new bear market. It’s easy to shout that the situation must inevitably worsen, now that they’ve deteriorated so far and so quickly.

However, in my view, investors appear overly pessimistic and there is too much talk of doomsday outcomes and apocalyptic forecasts. I think investors should start preparing for better times ahead.

Stay alert and be ready to shift from macro, technicals, and other investment tools, and turn back to earnings revisions to help add alpha to your portfolio. Remember the old Wall Street saying, and it rings true no less now: When you should be buying, you probably won’t.  There’s a lot of fear out there. Clients and subscribers can click here for the full report.

I’d like to point out in this note a few important factors:

  • As we noted here last week, some key aggressive tactical indicators flashed buy last Friday, March 20, after positively inflecting from extreme negative readings…
  • This historically suggests a high likelihood that a tactical trading bottom was in place that would tend to last only 1-4 weeks and fail.
  • Our work suggests that it’s unlikely that all the selling pressure is over, and that volatility will begin to head back down to much lower levels. Nevertheless, the good news view is that the likelihood of significant lower lows for the S&P 500 has greatly diminished.
  • Investors need to really be focusing on how they should be positioned for what we expect will be a significant improvement in equity performance for the remainder of the year. 
  • In thinking about a future that is not apocalyptic, we are including a list of ten 2H20 potential surprises below.

2H20 Surprises

  1. The S&P 500 has seen its price bottom and UST 10-yr yields have also seen their lows.
  2. Peak COVID-19 cases will be reached and widespread lockdowns will be done before May starts.
  3. A short-term medical solution comes into focus over the next month while progress made on long-term vaccine is still in the works.
  4. 2Q20 GDP and corporate profits are both bad, a sequential annualized decline of 5-15% and a yr/yr contraction of 25-50%, respectively, but 2H20 sees the beginning of a V-shaped economic recovery that leads to 4Q20 profits posting positive yr/yr growth.
  5. The S&P 500 reaches an all-time high before the year ends. Yes, that’s what I said.
  6. The equity market rally is led by offense, a mix of cyclicals, financials, and secular growth…
  7. …While the laggards are traditional defense areas including Utilities, Real Estate, and legacy Telcos.
  8. 10-yr yields move back over 1% and head towards pre-crisis range of 1.5-2.0%.
  9. The U.S. greenback, on a DXY basis, falls below 100 and settles in a range of 96-99.
  10. And before 2020 ends, early rumblings about rising inflation expectations during 2021 and chatter about when the Fed will start to take back their emergency policy responses.

Bonus Surprise

For those of you who have read all the way to the end and are wondering about a potential second COVID-19 wave that may come and the likelihood of an L or U-shaped recovery, our working assumption is that a medical solution becomes available that preempts it before it begins.

Indeed, under this scenario, the impact would likely be small or nonexistent relative to what’s going on during the current wave. Consequently, the comparison with the 1918 Spanish Flu second wave is less likely to occur in my view and that the bearish implications will not play out.


Despite continued volatility in equity markets and the absence of a medium-term buy signal from our key directional indicators, we are retaining our medium-term bullish view and will view any future weakness as possibly that last opportunity for investors. Our research and view of the macro landscape continues to suggest that investors overly positioning towards defense will ultimately miss a powerful reversal that will prove challenging to forecast in advance.

Therefore, we reiterate our offensive positioning with a six- 12 months outlook. Critically, we continue to strongly advise investors to keep looking for attractive entry points to add exposures into the areas we like instead of trying to pinpoint THE bottom.   

From an aggressive tactical perspective, our key short-term indicators flashed a buy signal on 3/20 from some of the worst readings we have in our database, which suggested a tactical bounce was likely to begin. However, our medium-term work is still falling, which strongly suggests that the current rally is likely countertrend and will ultimately fail after 1-4 weeks.  Importantly, this leads to the final process and setting up THE bottom.

Disclosures (show)