5 Reasons I Don't Like Stocks or Bonds Right Now

The perfect storm seemed too cliché. The stars aligning sounds positive when I am anything but positive. Lowering the S&P 500 target to 2800 or calling for a 10% decline in stocks, while accurately reflecting my view, seemed a bit bland. So, I went with a laundry list of reasons why I'm bearish. Jay: Tell Us Something We Don't Know? The Fed is on hold. The 3-year Treasury yield was 0.26%, so hardly earth-shattering news on the Fed. Fed Chair Jay Powell did seem to steer toward yield curve control (probably not great for financials) and away from negative rates (really bad for financials). He also mentioned that we would be doing better with more stimulus. I completely agree with him. While not new news (I think Ben Bernanke was also begging D.C. to do more), it is a good segue to our next section. D.C: Too Many Victory Laps, Too Much Finger Pointing, Not Enough Doing We need the next round of stimulus. More importantly, in fact far more importantly, we need job-creating stimulus. We need to rebuild our manufacturing base. We need to spend money on infrastructure to support that manufacturing base and to create jobs while manufacturing returns. I thought we had an 80% likelihood of seeing that. I am dropping that to 40% and that estimate already seems high and is falling fast. The hurdles that D.C. needs to overcome are: All-time highs on stocks. This is a hurdle. Improved jobs. Victory lap time. The cost. Little has been said about how we will be paying for any of this. That is starting to become a topic of conversation. Income inequality. This has come to the forefront and is a serious issue facing the country, but solving this problem in the midst of a pandemic-induced, government-enforced shutdown that led to a recession is going to be difficult to do. I am a big KISS fan -- keep it simple stupid, not the band (though that's probably a guilty pleasure). I am not diminishing the problems that inequality is causing, just that it makes an already difficult task, more difficult. Timing is crucial and by trying to do too much, we may do little. Incumbents feeling secure in their seats. Back in March, you could feel the fear in D.C. Virtually every elected official seemed worried about getting re-elected. The fear was centered on the economy. That fear has dissipated. That fear, for some, has been replaced by fear of how they are handling protests. Those politicians without fear of their own seat, tend to gravitate to the party rather than the people. They go back to worrying about ensuring that their side has the best chance to take Congress, the Senate and the Presidency. None of that is good for getting policy out of D.C. Powell said it and I completely agree -- we need more fiscal, I just don't think it is as likely as it was a couple of weeks ago. Covid Some states are seeing increased hospital bed usage. Others are doing well with the reopening. It is a valid and lingering concern for our country and across the globe. Nothing I have seen changes my view that we can reopen safely, but the data does hammer home that it will be a gradual reopening. I think Covid-19 is one risk the market is appropriately pricing right now, but that risk could shift (either direction) fairly quickly. Positioning A lot more bulls than just a few weeks ago. Some big bears have thrown in the towel. Retail investors, who had seemingly had a resurgence in their importance to daily moves, seem aggressively positioned. I find it incredibly difficult to convince people to be short here -- stocks or credit. I think both are susceptible to a pullback. I also think, ironically that it will be the safe stocks and safe bonds (including investment grade) that will pull back the fastest. Not because they are worse, but precisely because they have acted as safe havens and have the most risk of outflows. Crowded longs are the risk and that is where I see the risk. Liquidity Works (or Doesn't Work) in Both Directions When markets fall, people bemoan the lack of liquidity. When markets go up, we accept full responsibility for making smart investment decisions. The reality is that liquidity remains low relative to where it was in January. It doesn't take much selling (or buying) to move markets. That has likely pushed us too far, too fast, because we are giving more credence to price action in an illiquid market than we should. I've watched bid without flip to offered without in a heartbeat several times in my life and I think we are on the cusp of that again, particularly in corporate credit. We've seen a huge influx of new investors that was met with a wall of new issuance. I think we will see some indigestion and it will cause spreads to back up relatively quickly. In investment grade, if you are an issuer, issue now. If you are a buyer, be more cautious. Bottom Line: Full Risk-Off I don't like equities or credit here. I do think that the sectors that were left for dust in March will actually outperform on any leg lower. They never caught up and were hit too hard the first time around. So, keep a reopen vs. work from home bias in your portfolio, just keep it to the short or underweight risk side of things. I'm neutral on rates (switched the other day). They almost got to 1% but it got to the point that I cannot be this bearish risk and hate Treasuries. Though I don't really like them all the way back down to 70 basis points either. Be safe and be cautious!

5 Reasons I Don't Like Stocks or Bonds Right Now

There's a host of factors that play into my full risk-off stance.

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