Think Twice About Chasing this Rally

The market has surged 25% since its late-March low. Is now the time to go all in again or should investors be wary?

This story was originally published here.

Why is the stock market rallying?

I’m not necessarily claiming it shouldn’t be rallying, but as a thought exercise — even though stocks are down a bit as I write Monday morning — what’s your answer to why the S&P has surged 25% in three weeks as of Friday’s close?

Odds are, you might point toward how global authorities are beginning to get a handle on the growth of COVID-19 … how the financial stimulus will soon be kicking in … how there’s discussion of reopening the economy … how things could begin to get back to normal sooner than later.

All valid points.

But a follow-up question …

Do you think those points warrant this 25% rally, and that it should be sustained? In other words, does our current stock market valuation accurately reflect where stocks should be trading right now?

Keep in mind, from its all-time-high set back in mid-February …

Despite historic U.S. unemployment …

Despite the nation still being under lockdown …

Despite investors not knowing the full impact of COVID-19 on corporate earnings …

Despite 295 companies having now pulled their guidance …

Despite nearly one-third of all apartment-renters having been unable to pay April rent …

Despite the prediction from leading economists that the U.S. economy will contract by 30% from April through June …

Despite Fed Chair Powell saying the U.S. employment situation is deteriorating “with alarming speed” …

Despite IMF Managing Director Kristalina Georgieva saying “We anticipate the worst economic fallout since the Great Depression” …

Despite all that, as of Friday, the S&P was now down just 17% from its all-time-high.

Now, I’m not a bear. My portfolio has taken a massive wallop like everyone else’s, so I’m rooting for a vigorous, sustained recovery. But I’m suspicious of this 25% rally over the last few weeks, and today, we’re going to look at why you should be suspicious too.

Editor's Note: To keep reading, click here.

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