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May 29, 2020

The Bulls and Bears of Wall Street

Frank Cabibi

The Pandemic and US-China Relations

Overview

In 2019, the US and China were in constant feud over trade negotiations regarding the stealing of US intellectual property and increased tariffs on US and Chinese goods. These negotiations led to a considerably volatile market and became a dangerous, but somewhat predictable time for traders. After almost a year, feud sparked up again amid Washington’s legislation to delist a number of Chinese stocks from the American Stock Exchanges. Investors are worried that the same volatility will return in this fuming debacle.

SPX500 compared to the movement of the US30.

A number of concerns loom over investor sentiment that leave most traders with mixed feelings. Some prevalent issues include:

-$14 million in household debt
-Consumer Spending at a record decline of 13%
-The pandemic that shut down the economy for over a month hurt and even destroyed small and med businesses
-Lifetime bull, Warren Buffet selling millions of dollars of assets
-Analysts worried of economic recovery taking longer than planned
-38 million in jobless claims

The Bulls

These problems have stirred fear throughout the economy as the Fed does whatever it can keep prices increasing through printing money and monetary policy. Interest rates are almost zero, leaving almost no motive to keep money in the bank. Interest rates are very close to zero. And when people can’t make good interest on their money in a bank, they’ll move it into things that do (like the stock market).

The US is also planning on delisting a number of Chinese stocks from American Stock Exchanges once legislation is passed. Some investors argue that cutting China off from US exchanges will cause more demand for American stocks, and people will not look to invest in offshore companies but in their own.

The Bears

From the concerns I listed above, investors cannot understand the current valuation of the market, even if this is just a temporary problem that will go away in the future. The P:E ratio is not supported by projected revenue, and the market looks to be very overvalued. CNBC’s Jim Cramer believes that a quick recovery isn’t appropriate given the situation at hand, and the recovery will take longer than expected.

What Now?

Between the fed’s support battle to prop up the economy and US and Chinese tensions getting worse, the market is very mixed. Right now, the SPX500 broke above the 200 DMA and the US30 is struggling to close above it. President Trump is speaking today in a press conference which started a sell off and slight recovery in market prices. If we see negotiations end poorly (increasing tariffs), we may see the bears walk away with profits. As of now, sentiment is pretty low and analysts are expecting some short selling in the meantime. Others are also expecting a drop in prices for the long term to level out our Price to Earnings ratio.

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Disclaimer:

Please note that this email is my personal opinion only. I am not a licensed financial advisor, and any information shared or discussed is not to be construed as investment advice. Trading and investing involves a degree of risk, and is not suitable to all investors. Please consult with your financial advisor before making any sort of investment decisions.

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