https://www.wsj.com/articles/stock-scenarios-for-a-madcap-year-11597607961
Every weekday before stock markets open, thousands of “morning meetings” at investment funds are jam-packed with analysts, portfolio managers and chief investment officers. Who’s doing what to whom? Is our macro view about to fall off the rails? Is Amazon going to beat our earnings estimates? The best firms discuss various scenarios and what-ifs so there are no surprises.
Right now, there’s not a lot of margin for error in investing. Most indexes, because they’re weighted by market capitalization, are basically surrogates for Apple, Microsoft, Amazon and Google. At over $300 billion, Tesla feels like it’s valued at almost the cumulative profits of every auto maker since the Benz Patent-Motorwagen hit the road in 1886. That’s probably not far off. Ten-year Treasurys are at 0.7%—hardly worth collecting interest.
It is said that stocks “climb a wall of worry,” meaning that when bad news and worry are reflected in stocks, it’s time to buy. Stocks peak when everyone stops worrying and it feels like nirvana. Kinda like now. Despite virus mania, it’s an Alfred E. Neuman stock market: “What, me worry?”
So what’s the bear case, the worry scenario, that investors discuss in hushed tones even as the market soars like a SpaceX rocket? I used to enjoy visiting one investment firm in Minneapolis. On the white board, someone wrote, “State your conclusions upfront.” So here are four potential scenarios, with some conclusions. As Wall Street strategists like to say, this is not investment advice, unless, of course, it works.
• Inflation returns with a vengeance. Pfizer CEO Albert Bourla says a Covid-19 vaccine could be coming soon. By October, he told the Washington Post, “there is high likelihood that we will know if it works.” From there it moves quickly to Food and Drug Administration approval, and Pfizer plans 100 million doses by year-end.
Then the economy would reopen quickly. Goldman Sachs thinks unemployment will decline to 6.2% by the end of 2021. With a vaccine, maybe it goes to sub-4%? (At this point a buzzer sounds and I’m thrown out of the morning meeting for waffling. Investors need to pick a side and state their conclusions, else they become one more equivocating opinion.)
• Joe Biden wins; the Senate flips to the Democrats. Stocks get nervous. President Biden wants to raise the top income-tax rate to 39.6%, the same for dividends and capital gains, and increase the corporate tax rates to 28% from 21%. Treasury Secretary Elizabeth Warren and Fed Chairman Lawrence Summers lobby Congress to make it happen. The Tax Foundation thinks this would reduce gross domestic product by 1.5% long-term—so at least there won’t be any inflation!
The bad news is that the net return for stocks may drop by a third, from a combination of less earnings per share and less cash on cash returns when a stock is sold. Oh, I forgot to mention—the Green New Deal gets repackaged as the Protect Our Radiant Kids Act, or PORK. Deficits soar. Sell most stocks, especially energy. Buy green. Buy bonds because rates are probably going negative.
• President Trump wins, but the Senate flips. Executive orders multiply. The China trade war explodes. The administration bans the Chinese app WeChat from iPhones, and Apple sales plummet—Greater China is 15% of total sales. Also, Congress rewrites (and the president signs) antitrust laws and abolishes Section 230, which protects social-media sites from lawsuits based on users’ posts. Sell tech stocks and most other exporters.
You can hear the eye-rolling of portfolio managers, who are bullish by nature. Their job is to buy stocks, not sit on cash. Is there a bullish scenario? Sure.
• Divided government. Vaccines take a few years to roll out. Unemployment stays high. The slack in the economy grows as commercial real estate sits empty for years. The Fed stays zero-bound and polishes the optics of quantitative easing. Stay-at-home life gets perfected. Cocooning is the new normal. Whatever stocks worked for the past decade will work for the next decade. But when no one worries, start worrying.
