Market Watch: There's a Danger in the Disconnect Between Complacent Markets and Weak Fundamentals, Analyst Warns

Article by Steve Goldstein in The Wall Street Journal Market Watch

All roads seem pointed in one direction at the moment. The S&P 500 closed up on Tuesday for the third-straight session, extending the rebound from the March lows to nearly 38%.

“It’s the biggest disconnect I can remember in the almost-quarter century I’ve been active in the markets,” he said. “I can’t recall a time when we’ve seen a large disconnect between, not just what’s going on in Main Street versus what’s going on in Wall Street, but what’s going on in the underlying fundamentals that would normally impact Wall Street.”

Larson said it’s unlikely a V-shaped recovery in the economy will take place. Even situations that previously caused markets to gyrate — like U.S.-China trade tensions — are now largely brushed aside. “We’re seeing a clear and an obvious breakdown in that relationship and yet the markets have hardly blinked.”

The markets also have ignored the protests over the police killing of George Floyd and ensuing violence that has gripped cities nationwide. “It’s hard as an American, much less as an analyst or investor, to look at what’s going on in Main Street in the last week, and believe that this isn’t going to have serious repercussions, or shouldn’t be having serious repercussions, in terms of risk appetite or the trajectory of any economic recovery and/or longer-term sort of impacts on society.”

“But when you look at whether, ultimately, the credit quality and the underlying fundamentals are going to support the asset values, you have to use some extraordinarily generous economic assumptions, and assumptions about the vigor of this rebound, to get from point A to point B. I think that’s the real danger here — I think that there’s a lot of complacency on what liquidity can accomplish when it comes to fixing solvency-related and asset valuation-related excesses.”

He recommends having a defensive posture in portfolios.

On a three-to-five year basis, safer plays from gold to longer-term Treasurys have outperformed, with the one exception being the technology sector, he said ...

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