• David Rosenberg — the famed economist and founder of Rosenberg Research — thinks the stock market is at a crucial juncture that's preceded sizeable drawdowns throughout history. 
  • In addition to the historical precedent that backs his view, Rosenberg highlights the following reasons for his bearish outlook: the permanent loss of millions of jobs, an overvalued market, an increase in savings, and blown-out high-yield spreads.
  • There are other permabears that agree with Rosenberg's assessment of the market. John Hussman — the outspoken investor and former professor who's long forecasted a stock collapse — conveyed a similar view in a recent client note.
  • Without a vaccine for the coronavirus, Rosenberg thinks a strong recovery is doubtful. 
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"Of course it's a bear market rally."

That's what David Rosenberg — famed economist and founder of Rosenberg Research — said on the "Things That Make You Go Hmmm..." series in response to the stock market's massive rally that kicked off on in late March.

"It is the classic, Bob Farrell, rule #8 that there are three aspects to every bear market," he said. "There's the initial plunge, the reflexive rebound, and then a long and drawn-out decline to the fundamental lows."

For context, here's a visualization of of Farrell's aforementioned rule in action. Below is a graph of the S&P 500's price action during the tech bubble and financial crisis, broken down into his three distinct phases: (1) plunge, (2) rebound, (3) decline.

Street Talk Live/Business Insider
Street Talk Live/Business Insider

"We're in the reflexive rebound right now," he said. "We had the mother of all reflexive rebounds coming of the October, 1929 crash. We had a 50%, six-month rebound."

According to Rosenberg, today's market action is most closely associated with "Phase 2" of Farrell's indicator — a strong fake-out rally stemming from a deep drawdown, followed by a lengthy decline. 

Here's how he divvies it up:

Phase 1 (initial plunge) — Complete. From February 19th to March 23rd, the S&P 500 fell 30-plus percent as the coronavirus proliferated throughout the world.

Phase 2 (reflexive rebound) — In motion. The S&P 500 trades about 6% lower on a year-to-date basis. Over a one-year time horizon, the index is up over 8%. 

Phase 3 (decline to fundamental lows)  — Yet to come.

In Rosenberg's opinion — and using history as a guide — the type of market behavior he's seeing isn't congruent with a conclusion of a bear market. It's simply following a classic historical progression.

"The message I'm sending my clients is this: Every bull market has it's pullbacks, just as every bear market has it's bear market rallies," he said. "And the bear market rallies can last for several months, and they can be rather significant."

He added: "Now, those are rallies that you want to rent. Those are not rallies you do not want to own. They don't typically have a long shelf life."

Some experts were encouraged by the market's stoicism and positive response to unprecedented monetary-easing efforts from central banks. Strategists at Goldman Sachs went as far as to declare that stocks have already bottomed for 2020, and boosted the firm's year-end forecast.

Rosenberg disagrees — and he isn't alone in his assessment.

John Hussman — the outspoken investor and former professor who's long predicted a stock collapse — shared a similar perspective when he said: "The current position of the market is reminiscent of the 'return to normal' trap in Jean-Paul Rodrigue's familiar chart of speculative bubbles." 

For context, Hussman provided the following visualization of Rodrigue's chart. "Phase two" of Farrell's rules, cited by Rosenberg, most closely resembles Rodrigue's "Return to 'normal.'"Both instances are followed by steep declines.

John Paul Rodrigue/Time/John Hussman
John Paul Rodrigue/Time/John Hussman

In addition to historical evidence, Rosenberg is quick to note the following as reasons for his bearish assessment:

  • A stock market that resides in the top 10% of historical valuations on a normalized basis
  • An estimated 5 million permanent job losses
  • Low interest rates denoting slowing economic growth and corporate profits
  • Spreads on high-yield bonds rivaling that of of the tech bubble and financial crisis
  • An increase in the savings rate delineating a gloomy consumer consumption outlook
  • A decrease in the labor participation rate

With all of that under consideration, Rosenberg thinks the likelihood of a strong recovery is doubtful.

"But I think that what the folly is, is for those people that believe we're going to have a significant recovery — because there is no significant recovery without a vaccine," he said. "In fact, I would say there's probably not going to much of a recovery at all without a vaccine."

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