Investors shouldn’t be “too optimistic” of the recent market rally, warns one Wells Fargo strategist.
Darrell Cronk, President of the Wells Fargo Investment Institute tells Yahoo Finance, “It would be unusual and unprecedented for a bear market or recession to only last 30 or 45 days. It just doesn’t happen.”
On Tuesday the Dow (^DJI) and S&P 500 (^GSPC) rallied for a second day in a row over optimism that coronavirus cases may have hit a plateau in some parts of the world and another possible stimulus package. By mid-session the S&P 500 was hovering around 24% above its 52-week intraday low hit on March 23rd.
Cronk warns the markets still need to digest expected high unemployment, GDP contraction, and first quarter earnings which he says haven’t been marked down enough.
“The consensus still has earnings declining above 7, 8, 9%, and second quarter is about 15, 16% right now. That's way too low for what we're going to have in GDP contraction,” said Cronk. “I think you've got some markdowns still ahead on earnings that the market hasn't been as realistic about as they should be.”
Cronk also expects an “unprecedented amount” of buyback and dividend suspensions in this earning season, adding “I think the amount of it will probably surprise to the downside.”
‘A short but very deep type of recession’
There is some good news, he said. “When we reopen, you'll have pent up demand, on the other side, quite a bit of it quite frankly. And also you're got unprecedented stimulus, right? That's gonna hit the economy.” said Cronk. “So there's good reason to believe that this one could be a very, short but very deep type procession.”
In the current market, Cronk prefers sectors which have outperformed on the way down, including information technology, consumer discretionary and communication services.
“We would fade places like energy, industrials, materials,” as those three have underperformed in this bear market, he added.
Ines covers the US stock market from the floor of the New York Exchange. Follow her on Twitter at @inesreports.