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The Market And Economy Continue To Diverge


  • The stock market rally continues to defy deteriorating economic fundamentals.
  • This is a function of Fed liquidity and misleading messages.
  • The bullish thesis is based upon a robust economic recovery in the third quarter.
  • That recovery is being undermined by ill-advised economic reopenings.
  • This idea was discussed in more depth with members of my private investing community, The Portfolio Architect. Get started today »

The Divergence

I keep asking myself the same question each day when I look at the year-to-date return for the S&P 500, which is currently down approximately 10%. Are the revenues and profits of restaurants, malls, movie theaters, resorts, airlines, auto companies, retailers, cruise ships, amusement parks and every other business either directly or indirectly dependent on the consumer down also 10%? The answer is no. In fact, business revenues and profits are down much more than that and unlikely to return to pre-pandemic levels for years to come.

This explains why Warren Buffett didn't buy stocks after the 34% decline in the S&P 500 and continues to hoard $137 billion in cash. Of course, he will say "never bet against America," but all that means is he isn't willing to short stocks. It doesn't mean he is going to buy them anytime soon, so don't misconstrue his eternal optimism for the country as bullish. He isn't putting his money where his mouth is yet.

Technology companies that have capitalized on the stay-at-home and work-at-home trends, in addition to healthcare companies that are involved in battling the pandemic, have fueled the Nasdaq's recovery. Those two sectors account for two-thirds of index profits. Yet if those pandemic trends are about to end on the basis that the economy is recovering, we should be seeing a rotation in sector leadership, but we are not.

After cratering 30% from its February 19 all-time high, the Nasdaq has now rallied back 31%. Yet this is not all that unusual. The same pattern played out in 2000 when the Nasdaq Composite collapsed 40% and rebounded 42%, which was then followed by another decline of 43% over the following four months. That rebound was as confounding as this one is today. The difference for me is that I was a perma-bull in 2000, reinvigorated by the

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This article was written by

Lawrence Fuller profile picture

Lawrence is the publisher of The Portfolio Architect. He has been managing portfolios for individual investors for 30 years, starting his career as a Financial Consultant in 1993 with Merrill Lynch and working in the same capacity for several other Wall Street firms before realizing his long-term goal of complete independence when he founded Fuller Asset Management. In addition to writing for Seeking Alpha, he is also a Leader on the new fintech platform at Follow.co.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The Portfolio Architect is published as an information service. Lawrence Fuller, the publisher, is also the Managing Director of Fuller Asset Management, a Registered Investment Advisor, which is unaffiliated with this Marketplace service. While this service includes opinions about buying, selling and holding a wide range of securities, the publisher is not acting as an investment adviser or providing advice or recommendations to any particular subscriber. Any investment recommended should be made only after consulting with your investment advisor or completing your own due diligence. There are risks involved with investing including loss of principal. Mr. Fuller makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals or the strategies discussed by will be met.

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Comments (134)

bengalesq profile picture
Ok. Nice read. You indicate your opinion that (given cases are still rising and we are re-opening to varying degrees) we are likely to experience a second wave. This assumes the heat doesn't fix the premature re-opening issue. The question is: If there aren't a new spike in cases (ever), will the market still go down when Q2 earnings come out? Is the market properly priced for now new spike in cases? I think it's still headed for a fall even without new cases but I'm curious on your opinion.

Note the correlations and where we are right now.

perceptions_now profile picture
There is more going on, than Politicians, the Media & others with Personal interest, will volunteer to tell us!
Lawrence : How exactly is Fed printing money & buying bonds resulting in stocks going up??? Can you please explain? Fed is not buying stocks, they have only announced that they might buy junk bonds. Fed measures have stabilized the credit markets & provided the much needed liquidity...
Trying to understand how it is causing stock market to go up??? Someone is taking the risk ...it is not the Fed. Like to understand who?
Diddly profile picture
The Fed is providing the liquidity for these companies to remain solvent.
@Diddly — “The Fed is providing the liquidity for these companies to remain solvent”.

And... exactly who are “these” companies exactly?

The US Chamber of Commerce, said in a recent report that 40% of small businesses may close permanently within the next six month—that’s roughly 12 million businesses. Many of whom can’t get access to “Fed liquidity”.
Robert Morie profile picture
Lawrence--I have to respond again to your economic views and argue that your conclusion are not correct. First and foremost, you mention that the market rally is defying economic fundamentals. Well that is very true, however that is what markets do in recovery periods and during the discounting process. You also mentioned "ill advised economic reopenings."

Who is to say that these openings are ill advised? The states have control over openings and their local expertise and knowledge far outweigh any general federal guidlines that the administration might have outlined. The beginning of California's economy is starting, under the gudance of Governor Newsom, and having some 30-40% of the U.S. economy start to come back is a big deal. Certainly it is far more important that having North Dakota open up.

You rightly point out that that the S&P really hasn't done much now that we are back to the 2800-2975 level and that is true. I mentioned last week that for three years this level has proved to have been a major support/resistance level. The rally off the March 23 lows has pushed us right back to this key level.

The Federal Reserves massive liquidity injections to support the credit markets and overall corporate liquidity should not be underestimated. This time they acted fast, early, and with determination to prevent any seizing in the fixed income markets and to put a floor under struggling corporations that need to have access to liquidity. It has been the opinion of many that the severity and quickness of the markets decline was in fact a combination of the uncertainty of the severity and mortality rate of the virus coupled with massive liquidity concerns. Once the liquidity issues were stabalized the market eliminated that risk factor rather quickly and rallied beyond most peoples expectations.

Your assertion is that the bullish thesis is based on a third quarter recovery. I disagree. The market is a leading indicator that looks out at least 6 months, not just three. The bullish thesis is in fact the view that the economy will adjust positively over a longer time frame and that while it may be a jagged reopening with fits and starts, we will be in a better position 6 months out. We are in fact discounting a recovery but over a longer period than just the third quarter. I think we also should realize that in six months we will have an even better understanding of the complexities of the virus and probably will have more medical tools to deal with it.

Regarding your point that; "the reopenings will fail miserably if the number of active Covid-19 cases climbs in days and weeks ahead," is an argument made without scientific proof and is an assumption that most people are not qualified to make. As you know, the view is emerging that as testing improves and broadens in scope we are finding that there is a larger denominator of virus infections than previously thought. As the real number of cases is better determined we seem to be establishing the fact that the mortality rate is much lower than originally thought.

In summary, while I am no raving bull and I understand the uncertainty of how and when millions of Americans will be back earning a living I have no concerns that the American people will find a ways to get back. We have had Pandemics and Plagues for thousands of years and they are not fun but you can't kee the world locked up forever. The mental health implications of this global lockdown are serious and people need to get back to living in the world again and not just in their TV room.

Lastly, you mention your unfettered bullishness during the Dot Com bubble. Understandable at the time and a good learning experience but don't let it taint your view forever. We did recover, and the market had quite a time up until the next crisis in 2008, and then we recovered again. Don't bet against America is a good theme whether Buffet is putting money to work or not. He is running an operating business, not just a mutual fund and does need to evaluate all his businesses and be prepared for any liquidity needs. He also did say he would like to make a large investment if can find one. Your learning curve might have started near 2000 but mine started significantly earlier and my lessons have shown that being more of an optimist is a better bet for a long term investor than being overly cautious.

Please say hello to your father for me. I hope he is good health and doing well.
Robert Morie profile picture
Sorry for all the typo's and omitted words.
soleprop profile picture
Some people on unemployment will go back to work, get sick, and die -- maybe a lot of them as the virus has already mutated. That lowers the unemployment rate permanently for those who do. The reports on unemployment will only see it as a reduction in numbers.

All of the money creation the Fed is doing has to cheapen the value of money and lead to some inflation. I expect most wages and salaries will be stagnant or lower than they were before. To me the implication is that a higher percentage of earnings will go to necessities, less to discretionary spending. Heaven forbid, but some folks might even save now that they know the dog's bite is as bad as his bark. The Fed is ill equipped to stem inflation without cauterizing and rubbing salt in still-open wounds. Less consumer spending is not the stuff of which a blazing economic recovery is molded.

I don't know why, but the situation right now reminds me of the old movie "Cool Runnings" about the 1988 Jamaican bobsled team, in particular the part where they are "practicing" in Jamaica using a bathtub sliding down a dirt trail in the mountains. The movie was funny (nothing good is going to come of this!) and also engendered some admiration for what they were trying to do. This market slide into the abyss isn't going to be funny (except perhaps sadistically) and won't inspire any admiration for those who hang on for the bottom.

There just isn't anywhere else to put money right now that is going to offset the coming inflation. I sense folks are just jumping from one "news-inspired" crap shoot to another hoping to time things just right. In this bear market rally, the trend is you fiend! Don't get caught with it hanging out when the bathtub topples upside down.
Tactical111 profile picture
The Country could go bankrupt, millions starve to death from "sheltering" or die from this "virus" and the "Market" would rip to all time highs. LOL You can't make this stuff up.
This article has it right:

Financials Are Painting A Dire Warning Sign For The Market

JrMastermind profile picture
What is supporting this demand for stocks? Where is all of this cash coming from? Has there been an uptick in foreign investment? Institutional investment? How have the number of shares trading hands changed? I'm still missing too many pieces of the puzzle.
Fed gives primary dealers money.
PDs buy stocks.
Markets go up while earnings plunge.

Since trump wants to win in November, he will direct Fed to continue this through November.
Then we can all sit back and count our money as we hurtle towards 4 more years of chaos, corruption, cronyism and chicanery.
Tactical111 profile picture
Seek help for your case of TDS. LOL "Corruption"? Oh yeah because he sold uranium to the Russians while taking $$145MILLION from Russian Oligarchs connected to the deal, took $1.5 BILLION from the Chinese for an "investment firm" for Don Jr. and put Eric Trump on a Ukrainian Gas Co. board for nothing to the tune of $$MILLIONS$$….oh wait. LOL
Don't waste too much time listing the facts to the libs....they're not interested in what's really going on and rely on Rachel to tell them what to think.
Jeff Anderson profile picture
My sentiments exactly ...
Ronald Surz profile picture
Great perspectives @Lawrence Fuller .

It's like the optimist falling from the skyscraper shouting "So far, so good." Expanding our perspective, I've written about a list of serious threats to the economy and warned about Covid weeks before it was declared a pandemic. These threats have now become more critical because Covid has weakened the economy. You can watch and hear our warnings on the Baby Boomer Investing Show: seekingalpha.com/...
Lawrence Fuller profile picture
@Ronald Surz Thanks for sharing Ronald, I'll check it out.
Have to come down on the bearish side as well because of something no one is mentioning: the inverted yield curve from last year. A caveat is that right now, ironically, the slope looks normal, although with the 30-yr at 1.38%, you'd have to get out an electron microscope to see it. The "normality" is probably the result of the Fed once again taking control of the entire range of Treasuries and decreeing from on high that the slope will be positive.

But what about that inversion from that year? What was that foreseeing? I understand the bond market has an almost mystical ability to foresee the future, but the idea that it could somehow sniff out an exogenous shock like this virus is a little too much.

Wasn't it more likely seeing a 2020 rollover even without a virus? Overextended PEs, home prices outpacing incomes again, just a normal cyclical slowdown. Throw a virus-shock on top of that, and it seems hard to believe the economy will be all-clear a year from now. Even with the $infinity-gazillion stimulus from the Fed, it's going to take a long time for next generation Amazons and Facebooks to emerge. During that time, we're bound to see some bad news that is actually treated as bad news by the market.
Salmo trutta profile picture
@Tanuge re: "But what about that inversion from that year? What was that foreseeing?"

There was already a downswing in the cards. Money flows, volume times transactions' velocity, was already decelerating. As I said:

The 4th qtr. 2019 is not the problem. The 1st qtr. 2020 will be negative.
Nov 26, 2019. 07:19 PMLink
@Tanuge wrote: “ The "normality" is probably the result of the Fed once again taking control of the entire range of Treasuries and decreeing from on high that the slope will be positive. But what about that inversion from that year? What was that foreseeing”.

From what I understand, it’s not the inversion that matters, it’s actually the normalization of the yield curve that ultimately causes equities to decline. The inversion is a warning sign.

There is a direct correlation between the 10-year and equity prices. I will see if I can find a chart that shows this and post it later.

Hard to say exactly how things will play out today given that yields are so low and then adding in the impact of the pandemic on supply chains and consumer demand.

It really is “different” this time.
@Tanuge — Unfortunately, I couldn’t find the exact chart I was looking for, but this is close:


Back in 2019, before pandemic pandemonium hit the economy, all that really mattered in my thinking was the 10-year and unemployment. But now, all of that think has been completely upended.

And now? .... Who really knows?

One day at a time.

"The difference for me is that...and ignorant of the macroeconomic headwinds that lay ahead. I should have been using the rebound to reposition for tougher times. Instead, I doubled down on the shaky bets that fueled the markets all-time highs. Twenty years later I'm a lot smarter and more experienced than I was then."

I appreciate your candor...Charlie Munger would now say, "his mind works right" and Warren Buffet would say, "he's no longer beholden to the Charlatans". It's why I read your work every week. I hope others do to, so they don't get caught in this "BULL TRAP".
Lawrence Fuller profile picture
@MrMrkt Thanks for that, we only learn from our mistakes, and I've made plenty.
papita profile picture
couldn't disagree more with this article and just about everything you have ever written. you are a real bummer.
Lawrence Fuller profile picture
@papita Not sure why you keep torturing yourself by reading my stuff then, give yourself a break and find something else to do.
papita profile picture
got plenty to do, but you're right. I'll have to make adjustments so I never see anything you write from here on in.
Tactical111 profile picture
Best idea you've had all week.
Well done analysis. Yet secular bull markets have rarely topped with a combination of extreme pessimism, very light positioning, large cash holdings, a growing wall of stimulus, and outstandingly accommodative CB. Momentum (properly managed) tend to be a better strategy than reversal of valuation in the long run. Yet at the cost of important drawdown.
pandnh4 profile picture
Hi Lawrence, love your articles and agree with many of your points... for a while this rally didn’t make much sense to me, but over time as my patience has been tested, I’m starting to doubt my original thesis that things were really bad and would drive down equities further... I’d be curious to read your thoughts...

my question now is, with all the liquidity and leverage available to investors, do earnings even really matter any more in the value equation? As earnings go down, you would expect equity prices to also come down... except if you have multiple expansion, which is what I think is really going on and coming from a number of different sources... first, you’ve got income which hasn’t really been affected since layoffs and furloughs receive enhanced unemployment benefits, with many ppl making even more than they were before... second, you’ve probably seen the Bloomberg article that states loads of new brokerage accounts being opened with the major brokers and lots of smaller investors signing up with Robin Hood... third, no live sports and gambling, so most likely part of that money is flowing into equities... fourth, very low yields elsewhere and funds shifting from fixed income into more risk-based assets... and fifth, as mentioned before, very large amounts of money supply and low interest rates allowing investors and “smart money” to increase exposure and leverage...

The “market” gains have been largely driven by a small handful of companies where the bulk of the SP500 is concentrated, providing the illusion that markets as a whole have recovered, but for many ppl that’s enough to convince everyone... I believe this is an equity bubble which is troublesome, but these things have a habit of inflating quite a bit before they pop, so it could be a while, and who knows what else the Fed and Congress do before then to further inject the markets with testosterone?
Lawrence Fuller profile picture
@pandnh4 Thank you, I think your patience is being tested by short term price swings, which I'd ignore. The Fed's objective is to get investors to question their bearish thesis and swing more optimistically, looking past near-term fundamentals.... its all about sentiment. If the fed can influence sentiment to the extent that price discovery is never realized, it can influence behaviors. This is its new policy path.

THis is very much like previous bears, and the market takes a lot of twists and turns before it ultimately bottoms. This is no different. I'd stay the course, but I'm always looking to build positions for the next bull.
The Fed is succeeding in influencing behaviours. New brokerage accounts are being opened in abundance. Folks are taking money out of their savings and buying this market. These folks are going long. Just listen to the folks on SA alone that are sitting on the sidelines with their cash waiting for the market to go down. So many investors sold but did't repurchase when the market moved up. Now we are in a situation with few sellers and mostly purchasers. Stocks are missing lowered earnings and still go up the next day. You receive terribly negative news about employment and the market does up nearly 500 points. The FED is not fooling anyone. They said that they would do whatever it takes and they have. We may disagree with what they have done but they have kept their word. When your "god" becomes money you will do despicable things to honour your god. Wall Street loves the president. He can lie, bully, etc. and we will let that go because he is doing what he said in making USA great again via helping the rich become richer. The people that say this is wrong (democrats, CNN) spend most of their time bashing the president rather than filling the news with good things that are happening and giving examples of what really makes America great. Fox news vice-versa. They spend most their time bashing the Democrats.
The FED has been doing what they are doing since 1913. Since 1945 the FED has had much more control of the whole world since the American currency became the dominant currency. Since 1976 when they decoupled the value of the dollar from gold altogether the FED has had even more power in influencing the financial system. This is why Ripley's says, believe it or not, follow the FED.
Lawrence Fuller profile picture
@happyperson I'd not that these retail activities are very similar to what has happened during previous tops. Also, most of last week's gains occurred when the market was not open, in overnight futures markets. Not the cash market, which is telling, as that's not retail investors.

The Fed is getting what they want more with rhetoric than actual buying. They haven't bought any corporate debt yet. The QE they started 6 weeks ago has slowed to a trickle on a relative basis, and the SP500 has been relatively flat the past 3 weeks. I think we may be running out of gas.
JohnB Investor profile picture
As much as I WANT to agree with this article, I believe it's extremely dangerous to try and reason out the stock market with logic. As the saying goes: the market can stay irrational longer than you can stay solvent." I've invested for a long time and you simply have to have a plan for when it moves. I am mostly in cash but there are plenty of reasons why the market might go up and plenty why it might go down. There are millions of people with billions of dollars making decisions every day on what makes sense to them. You cannot reason this away.
To me, we are right below a number of trigger points that start about 1-2% higher in the S&P. Other trigger points will come if there is a sustained move. The market hasn't been able to broach those levels yet, but it might and if it does you will lose money if you are short and you will lose the opportunity if you don't invest more.
Your job as an investor is to determine first whether we're in a bull or a bear and then to act accordingly, not to determine what is "right" or "wrong."
Lawrence Fuller profile picture
@JohnB Investor I agree with everything you said, which is why I've always got stock market exposure, about 35% right now, but I make judgement calls, as you said, about whether we are in a bull or bear, and whether we are in the short term going to rally or sell off, so I'm looking at short and longterm conditions for the market. As such, I increase or decrease my 35% exposure between 50% and 25% based on that analysis. That keeps me in the game, but allows me to be tactical at the same time.
Recession if not outright depression looming. Pandemic still uncontrolled and unpredictable. Worst short-term unemployment numbers we have ever seen and yet stock market cheers. Siegel says stocks through the roof in 2021. I guess it really is different this time. The bull is dead. Long live the bull!
Uncle_Rico profile picture
I feel like I’m waiting for the pullback I was waiting for from October to February again.
Patience, patience...It’s coming...

Atlanta Fed GDPnow (Q2 2020) -34.9% (prev. -17.6%)

I appreciate the article very much, and as always enjoy the comments at least as much. I’m 48 and sitting in all cash. I don’t consider my self stupid, and have been quite successful in business. We were fortunate to have properly capitalized the several small businesses we own and are surviving the downturn. The obligations I have to employees forces me to reserve capital in case this is protracted. I’ve been wanting to build a DGI portfolio for years, but keep looking at the market and saying, “its just too expensive.” Now I feel silly for not buying at the lows, but for the life of me, can’t figure out what to do next. I’m the most frustrated now as an investor as I have ever been! 2200 SPX seemed like a fair price given expected outcomes and I thought we’d dip lower. But we bounced never to look back. ADvice appreciated!
Considering how much the Fed inflates the stock markets it’s better to invest in a diversified portfolio of unlisted small businesses that you understand well. Yes, the market can go up but it’s future fall will be debilitating. Many of those ‘white elephants’ will not be able to repay their bonds.
I want to believe it will fall, somehow it's just too magical
@like beta — Hang in there, this is far from over in my opinion.

Assuming that fundamentals still matter, the plain fact is, earnings are circling the drain.

S&P 500 EPS and PE Ratios:


The Fed can print all the money it wants, but it can’t print earnings.

Back in 2008, roughly 7% of publicly listed companies had negative revenue (no real sales to justify their high P/E ratios). Fast-forward to today and that figure has skyrocketed to an estimated 12% of the Market. And this issue extends well beyond the energy sector. Think about all of the so called unicorns with no revenue, and add to that all of the private businesses that make up a large part of the economy, that will quietly disappear in this difficult economic environment.

Corporations that have been only marginally successful operating in a good economic environment, will likely need to go out of business in the coming months as demand for their products and services evaporate.

Bear Market rallies, such as we are experiencing now, are not unusual. It’s part of the bottoming process. Historically, retests of prior lows occur approximately 70% of the time, and I believe a retest of the March low will happen soon.
I'm 62 and retired at 58. I am debt free and live off my investments. As much as I love going on cruises, sporting events, out to nice restaurants and taking my grandkids to Disneyland. I just don't see myself doing any of these things until a vaccine comes along. During the quarantine time I have gotten really good at streaming anything that interested me. With the money I've saved I am going to be buying more equities at much lower prices than today. I almost feel guilty. Good investing to all.
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