“There are some potential things that are worrisome. In many ways we are going to be living from earnings season to earnings season,” said David Russell, vice president of market intelligence with TradeStation.
Earnings stink and risky stocks pop, but don’t fight the Fed
“There will be a lot lot of difficulty predicting what earnings are going to be like with a disruption of this magnitude,” Russell said.
But stimulus from the Federal Reserve isn’t going away anytime soon. The central bank will almost certainly keep rates at zero for years and it is pumping out trillions of dollars into the economy through various lending programs.
“Don’t fight the Fed” is a popular saying on Wall Street. Is it really that simple? It just might be.
“Markets are clearly responding to the significant stimulus in the US and throughout the world,” said Kent Insley, chief investment officer with Tiedemann Advisors.
Insley told CNN Business that the massive stimulus from the Fed as well as various programs from Congress should help the market for the foreseeable future. Cheap money will push investors into riskier stocks over Treasuries, which now yield next to nothing.
“lt may be a low growth environment but rates are going to remain low. Stocks still look more attractive over the long term compared to bonds,” Insley said.
Betting on an eventual rebound
Others are also dismissing concerns about weak profits.
“In the grand scheme of things, one year of earnings are not that meaningful for the valuation of a company unless there is a major liquidity issue,” said Sam Hendel, president of Levin Easterly Partners.
Hendel said he is worried about heavily indebted energy firms and struggling travel and leisure companies. But he added that firms in other parts of the market, most notably tech, consumer staples and health care, have the “ballast to withstand an economic contraction.”
Hendel also thinks it’s reasonable to think that a major biotech or pharma company will come up with a viable coronavirus treatment sooner rather than later. That could further boost health care stocks.
“We’re not trying to call the bottom on Covid-19, but we hope and pray for a vaccine coming as well,” he said. “What 9/11 was for the defense sector, Covid-19 is for health care.”
More broadly, there are still hopes that stocks won’t fall back into a bear market.
Merger activity is slowly starting to pick up as companies grow a little more confident that the Fed and Congress will continue to be there as a backstop to keep the economy from sliding further.
Ted Swimmer, head of capital markets with Citizens Bank, said that over the past two months, his firm has been positively surprised by the number of companies issuing new capital and talking about plans to grow again.
“The government is providing so much support, so I’d be surprised if the market touches the March lows again,” he said.