• S&P 500 index is up more than 40% since March 23
  • ERP has dropped to 5.81% from nearly 8% in March
  • This is a bull run or the largest bear market rally in history
  • Virus, macroeconomic and political risks remain

The U.S. stock market has been able to dodge everything thrown at it since it began its epic climb in mid-March. Investors are incredulous about the disconnect between macroeconomic data, fundamentals and stock prices. Stocks tied to reopening, like retailers and cruise lines, have been gaining steam, making the FOMO rally more broad and sustainable. New York University's Aswath Damodaran also calculated that implied equity risk premium for the S&P 500 has moved back down to 5.81% from 7.75% on March 23.

If this isn't a new bull rally, it is the greatest bear market bounce ever, as you can see in the chart below. And there's plenty of liquidity left. "Investors are still underweight equities and signs of overextension are confined to momentum traders," wrote JPMorgan strategists led by Nikolaos Panigirtzoglou in a note.

Bear market bounce
Source: LPL Research.

While some of you wait for the other shoe to drop and others focus on the bright future, Americans are increasingly booking short vacations, applying for new businesses and mortgages, and even visiting department stores. (see chart below) Testing has ramped up in a big way, crossing 400,000 a day now, and the percentage of positive tests are trending lower. Unemployment claims are slowing. We've seen record fiscal stimulus and support from the Fed. Goldman Sachs analysts on May 29 improved their forecast and said S&P 500 downside will not exceed 2750 and the index could even rally to 3,200.

reopening activity
Source: JPMorgan.

So far we have reasons to be optimistic, but there are still big risks to this recovery and the anxiety is palpable (and chartable).

Here are just some of the possible major obstacles in our way:

  • A spike in cases: We won't know what impact the combination of the reopening and massive protests will have on the outbreak immediately due to the incubation period of the virus. Look out for rising daily cases. 
  • The stock rally remains narrow: Goldman says broader participation will be needed in order for the aggregate S&P 500 index to climb meaningfully higher
  • U.S.-China tensions escalate in a big way: Trade is disrupted with supply chains affected
  • Jobs return at a slower pace than investors expect, indicating long-term damage
  • More stimulus doesn't materialize the way investors expect it to (Bloomberg reports one-third of unemployment benefits haven’t been paid yet)
  • Vaccine and therapy timelines increase from the highly optimistic ones touted in the press
  • The U.S. elections in November: If Democrats win the White House and the Senate, expect corporate and individual tax rates to rise