Q&A: Can You Trust The Stock Market Rally?

Are the bulls stampeding toward the cliff’s edge? Stocks appear to be recovering, but with the global economy mired in a deep recession and the coronavirus far from vanquished, many investors are wondering if the rally is too good to be true.

For answers, I interviewed my colleague Nathan Slaughter, chief investment strategist of The Daily Paycheck and High-Yield Investing.

Nathan is an expert in pinpointing investment opportunities in corporate takeovers. His previous experience includes a long tenure at AXA/Equitable Advisors, one of the world’s largest financial planning firms.

After attaining NASD Series 6, 7, 63 & 65 certifications, Nathan [pictured] moved to Morgan Keegan, where he managed millions in portfolio assets and performed consultative retirement planning services.

Nathan holds a degree in Finance and Investment Management from the Sam M. Walton School of Business. This week, I sat down with Nathan and asked him for insights into these extraordinary times.

The stock market has partially bounced back from its March lows. In April, the S&P 500 posted its best month in three decades. Can stocks maintain momentum, or should investors remain wary of rallies until the coronavirus pandemic is vanquished?

We haven’t seen the last “head-fake.” That’s when stock prices make a move in one direction, but then reverse course and move in the opposite direction, like a boxer trying to fake out his opponent.

The COVID-19 pandemic has inflicted serious pain on the global economy. But I believe the wounds are superficial and will heal. In my opinion, the selloff was overdone. The major averages tumbled 40% in just 28 trading sessions. The speed and severity of that epic collapse are unparalleled in the annals of market history.

But I would argue this bounce-back rally has also gone too far, too fast. Granted, the market is a forward-looking mechanism and the $2 trillion stimulus package will provide a major economic jolt. What’s more, several states are taking baby steps to re-opening.

Read This Story: Stock Market Rebound or…Bear Trap?

Still, it’s hard to justify this level of optimism, at least until we get a better read on second quarter earnings. That being said, if you wait until the “all-clear” signal has been given, the most attractive discounts in the market today will be long gone.

Can equilibrium be restored to the turbulent energy market over the near term, or will crude oil prices stay depressed into the foreseeable future?

Having spent many years as the editor of a commodities newsletter, I can tell you that crude oil movements are notoriously hard to forecast. I leave raw price speculation to others and prefer to look for competitively advantaged businesses that can churn out positive cash flows in both up and down cycles.

Of course, we’ve never seen a slump quite like this before. Much has been made of the fact that an oil futures contract recently dipped into negative territory for the first time ever. There is a big difference between low prices and having to literally pay somebody to take physical delivery of your oil.

It’s an upside-down situation for sellers to pay buyers. But without refineries, unprocessed crude oil is utterly worthless. June contracts for benchmark West Texas Intermediate (WTI) have already tumbled to around $12 a barrel and could slide into negative territory again.

OPEC has pledged to curb production by 10 million barrels per day, and Permian Shale producers are turning down the spigot as well. But there is still too much excess supply sloshing around. With drastically fewer cars on the road and planes in the sky, crude consumption has diminished by approximately 30 million barrels per day.

Read This Story: OPEC’s Oil Cut: Big Deal or Big Dud?

With that imbalance, storage tanks are nearing maximum capacity. Stockpiles at the nation’s main hub in Cushing, Oklahoma have reached 60 million barrels and could fill to the brim in weeks. I don’t see a meaningful near-term recovery.

Many weaker players won’t survive this storm. That starts upstream. But as the dominoes fall, it could topple offshore drillers, equipment vendors, and even some pipeline owners.

Here’s the good news. Many large producers have learned their lesson from previous crashes. Disciplined outfits such as ConocoPhilips (NYSE: COP) have worked diligently to shore up their balance sheets, lower breakeven costs and live within their means. They have ample liquidity and can defer capital spending for a while, hunkering down until oil demand picks back up.

In the meantime, there is always a silver lining. The supply glut is a boon for companies such as Nordic American Tanker (NYSE: NAT), which is charging desperate customers such as ExxonMobil (NYSE: XOM) up to $70,000 per day to use its ships for floating storage tanks. I’m evaluating this high yielder as a potential candidate.

As some states incrementally open their economies and pull back from social distancing, the optimists on Wall Street are hoping for a “V” shaped recovery. Do you foresee the battered U.S. economy quickly bouncing back or will recovery take much longer?

Some optimists think the economic recovery will be just as speedy as the collapse. That would resemble the “V” shape you mentioned. Others see a “U” shaped recovery on the horizon as we muddle along for a while before healing. I’ve seen some dour forecasts suggesting we won’t return to normal until the end of 2021.

I suspect the truth probably lies somewhere in the middle. I don’t envy state governors trying to balance advice from health experts with the need to re-start their economic growth engines.

Federal guidelines suggest a sustained 14-day downtrend in new virus cases before re-opening. As we speak, at least 16 states from Texas to Minnesota have met that requirement and outlined various plans to ease restrictions, at least in stages.

Read This Story: Don’t Bet on a “V” Shaped Recovery

Other states may be close behind, keeping a wary eye on the number of new COVID-19 cases to ensure there isn’t a relapse. The question is, how long will it take after the green light is given until we are back to business as usual?

Some pundits insist that consumers will be too scared to come out of hibernation. Frankly, I don’t subscribe to that theory. In fact, many people had to be forced into quarantine, even when the disease was still raging.

Some of the more vulnerable may continue to limit their social interactions for a while. But with the outbreak winding down and far less virulent than initially feared, millions are clamoring for sunlight and fresh air. There is a tremendous amount of pent-up demand to get out of the house…to a favorite restaurant, a family bowling night, a gym workout, anywhere.

Whatever their revised occupancy limits, I think many facilities will quickly test it. And let’s not gloss over the $2 trillion stimulus package. It was unprecedented in size and scope and will be a much-needed shot of economic adrenaline.

Second quarter GDP numbers will be ugly, but I expect growth to embark on a strong upswing by the third quarter.

As the global economy grapples with a coronavirus-induced recession, which sectors are poised to be winners and which will be losers?

Whenever the playing field tilts, it always favors some sectors and hurts others. I’m not terribly enthusiastic about the banking clan right now, which will likely see shrinking loan origination volumes and thin lending margins. I’m also shying away from oil equipment and services. With crude at the lowest level in decades, producers are cutting spending to the bone and leaving nothing but scraps for the vendors.

On the flip side, any business that uses petroleum-based raw materials, such as petrochemicals and plastics, will see sharply falling costs. That’s one of the reasons I added packaging maker Amcor (NYSE: AMCR) to my portfolio recently.

But let’s think bigger. While this pandemic may not reshape the global economy, it’s certainly hastening some seismic shifts that were already underway. One of those is telemedicine. It’s no surprise that consumers prefer to chat virtually with their physician rather than drive across town to a waiting room filled with sick patients.

Many hopeful players in this nascent space have developed specialized apps or software to facilitate meetings. I’ve got my eye on a frontrunner that works with 12,000 clinics, hospitals and other clients in 175 countries worldwide. Virtual doctor visits on its platform have surged to 20,000 per day. I’m expecting big things, even after this health scare abates.

Editor’s Note: In the above interview, Nathan Slaughter has given you insights into the virus-afflicted markets. As I noted in the introduction, Nathan is an expert in finding investment profits in corporate takeover activity.

Nathan has developed a proprietary screen that uncovers how Wall Street rigs certain stocks that are involved in mergers and acquisitions…so you can jump in before these stocks shoot up in price. In fact, Nathan is ready to reveal his latest winning stock trade. Do you want in? Click here now.

John Persinos is the editorial director of Investing Daily. You can reach him at: mailbag@investingdaily.com