Ed Yardeni is a glass half full kind of guy. That positivism has allowed the head of Yardeni Research to be completely correct for several years now about the upward direction of the major stock indices.

In his latest research note, Yardeni presents the bull and bear cases for where the markets may go next.

Not surprisingly, he believes stocks are going higher with the S&P 500 hitting 3,500 by the end of this year from 3,375, as of this writing, and 3,800 by the end of 2021. 

Here’s a summary of Yardeni”s bullish and bearish “What If” scenarios:

  • What if a vaccine is ready for widespread distribution by the end of this year or early next year?
  • What if death rates fall as medical professionals continue to learn more about the best available treatment protocols to speed up the pace of recovering from COVID-19?
  • What if faster tests for the virus become widely available in coming months?

If we make lots of progress on the health front in the world war against the virus, then we may continue to make progress on the economic front as well.

  • What if the V-shaped recovery continues to be V-shaped?
  • What if productivity is starting a significant secular rebound?
  • What if the labour market recovers as dramatically as it cratered when governments imposed lockdown restrictions?

If the economic news continues to improve significantly during September and October, that should benefit President Donald Trump in his bid to win a second term come November 3.

  • What if Donald Trump is reelected for another four-year term and the Republicans continue to have a majority in the Senate, but not in the House?
  • What if all of these questions turn out to be rhetorical ones, implying that the outcomes will be bullish?

Well then, the outcomes will be bullish. Now consider the following related observations that support staying optimistic on the prospects for the US economy and bullish on the stock market:

(1) Real GDP. It certainly has been a V-shaped recovery so far.

(2) Plenty of stimulus. Payroll employment has rebounded 10.6 million since bottoming during April through August. Aggregate weekly hours has jumped 10.9% from April through August.

Our Earned Income Proxy for wages and salaries in personal income is up 8.9% over the same period.

(3) Auto sales. We’ve recently been writing about the beneficiaries of de-urbanization. The housing industry is a clear winner as long as the houses are in the suburbs or rural areas.

And sure enough, the data confirm that US motor vehicle sales accelerated from only 8.7 million units during April to 15.2 million units during August.

(4) Productivity. One of the biggest positive surprises resulting from the Great Virus Crisis (GVC) might be a secular rebound in productivity growth.

The extraordinary drop in real GDP during Q2 coincided with an even faster drop in employment, resulting in a 10.1% jump in productivity during the quarter, the best reading since Q1-1971.

The Bearish Scenario:

  • What if the V-shaped recession morphs into a double-dip W-shaped economic pattern?

That could happen if the pandemic worsens during the fall and winter. It could also happen if Washington fails to provide another round of stimulus checks as another wave of bankruptcies among services companies leads to another wave of layoffs.

The result could also be a K-shaped recovery, where the haves continue to do well while the have-nots continue to suffer. That might not cause another recession, but it could cause a growth recession, with real GDP growth stalling around zero.

A double-dip, W-shaped recession or a K-shaped stalling of economic growth could mark the September 2 record high of the S&P 500 as the top for the rest of this year, or at least through the November 3 election.

  • If the presidential election result is bitterly contested, that could drive the stock market lower after November 3.
  • If the Democrats win the White House and both congressional chambers, stocks could remain under pressure on expectations of a radical regime change in economic and regulatory policies.
  • What if inflation makes a surprising comeback?

That would be a big surprise if it were to happen over the next 12-18 months. For it to do so would probably require a surprisingly strong continuation of the V-shaped recovery resulting from all the stimulus provided by fiscal and monetary policy so far this year.

In any event, the Fed remains committed to maintaining ultra-easy credit conditions for the foreseeable future even if inflation finally and sustainably rises a bit above the Fed’s 2.0% inflation target.

That could fuel a resumption of the meltup in stock prices, which could set the stage for a meltdown down the road.


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