Protests show the economy can reopen quickly: strategist

Yahoo Finance’s Alexis Christoforous and Brian Sozzi break down today’s market action with Michael Lee of Michael Lee Strategy.

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ALEXIS CHRISTOFOROUS: And we have a new trading day underway, folks, so we saw stocks are rallying into this market this morning. The Dow futures were up better than 1%, and we are extending that rally here in regular trading. Let's welcome in Michael Lee now of Michael Lee Strategy along with Brian Sozzi and Jared Blikre. So Michael, we've got the Dow up 200 points here seconds into the trading day.

It seems like all roads are pointing up lately, right? I mean, we've got the S&P 500 up about 38% since the March lows. In your career, have you ever seen such a big disconnect between what's happening on Wall Street and what's happening on Main Street? And not just that, but also when you look at the fundamentals of this market, you know, data that is weak that would normally push this market off a cliff is really doing just the opposite.

MICHAEL LEE: So Alexis, you know, no, I have never seen data this disconnected from what's going on in markets, but we're in extraordinary times. I think the explanation from this has to go to a new word that's been floating around. The freasury, which is a combination of the fed and the treasury, you know, similar to Bennifer or some of these other funny acronyms that we've had out there. But the action they've taken is really dramatic, and if you take a step back and you think about it, you've essentially eliminated bankruptcy risk, insolvency risk for the bulk of the S&P 500.

So if you're going to invest, so how does it-- what's the risk of investing in a stock? The risk of investing in a stock is that it goes bankrupt, OK? How does it go bankrupt? It runs out of money. And if you are not going to have any liquidity issues because of the programs the Fed has put in place, that would mean that there's a lot less risk in the overall markets leading to a higher valuation.

What it also does is assure somewhat of a V shaped recovery. OK, because many of the largest companies are going to stay solvent, stay in business, be able to continue operations, continue paying people. OK, when you add that to the fiscal stimulus, which by all means, it looks like it's working really well. You have personal incomes jump 10% last month, which was the highest ever. You have the savings rate at 30%.

So it looks like this demand is really going to be there on the other side. Well, you know, so the demand shock I think has been remedied to a certain degree and the supply shock. So I'd say the good part about these riots, these protests, this looting is that we can give up this social distancing unless there's a massive break out in the next two weeks, which I don't see happening.

So you're going to start-- you're starting to see things being solved from both the demand side and the supply side and also all of these lending facilities that the Federal Reserve and the Treasury have set up to assure the companies stay in business means that we're not only going to have the steepest recession, we're also going to have the quickest recovery. And I think the recovery may end up being just as violent to the upside as the recession was to the downside.

BRIAN SOZZI: Michael, I think you just called the market top by dubbing this the freasury rally.

[LAUGHTER]

MICHAEL LEE: I hope not.

BRIAN SOZZI: I'm just saying, I've been around the business a while. That's what happens. But I don't want-- listen, the market rally, it is what it is. But what is the one data point, what is the one thing you would see that would take down this market? COVID-19 hasn't taken down this market, protests have taken on this market, revarious new tweets from the president hasn't taken this market. What would take down the market?

MICHAEL LEE: So what I see is evaluation. Do we get another 10% or 15% run from here? And then on the other side you see profit taking and then shorts coming in and then everybody ensuing into a panic. So I see valuation as kind of the only catalyst right here. If you look at the bottom of a recession, it's typically between when initial claims and continuing claims both peak and it seemed continuing claims start to decline. So if initial claims peaked at the end of March and continuing claims peaked in the middle of April, that means the bottom of the recession was somewhere in between there, and we are now entered the recovery phase.

So I can see this economy and the unemployment rate snapping from a 20% to a high single digit percentage point very quickly. And when you add to that the liquidity that's out there in the form of the Fed stimulus. So you've put six trillion dollars into an economy and the Federal Reserve Chairman saying, hey, we've basically got an unlimited amount of money to fight this.

Now, that can't work forever, and there are many long term problems associated with that. But in the short term, financial markets have recovered. And with those financial markets recovering, you also have the aspect of the wealth effects. So if people's 401(k)s are at 95% or 85% of where they were at all time highs, people can have confidence to go out and spend, especially if they see their job picking up.

They see the economy opening up. It leads to this coming back. And knowing that you have that Fed backstop that a lot of these major companies have no risk of running out of liquidity, running out of capital, it means you're going to have much higher valuations in these companies because you've eliminated default risk for most of them.

So you know, this reminds me of June 2009 where the market had rallied 30% to 40% off its lows, and you're looking at the economic data. It looks terrible. Remember, unemployment didn't peak then until March of 2010, so things were getting worse. You had a much less business friendly administration than you do right now, and there was a lot of angst against corporate America at that point which I don't think you see right now. So I think you have the runway for much higher stock prices over the next three years, and a lot of people that were bearish in 2009 were bearish up until a couple of months ago, and they missed this entire rally. So I'd say to people, you need to be invested, you need to stay invested.

ALEXIS CHRISTOFOROUS: All right, guys. I want to bring to your attention Stanley Black and Decker up 3.5% right now. Looks like a lot of people are going out there and buying some power tools, maybe doing some projects around the house. You know, Stanley Black and Decker also are raising its revenue guidance for the quarter. Let's check in with Jared Blikre now for a closer look at commodities. Namely Jared, I'm looking at the dollar here and oil which is a little bit higher today.

JARED BLIKRE: Yeah. Crude oil just keeps pressing higher defying expectations, and we did have some negative potentially bearish news overnight, and that's when we saw this dip just a little bit ago, but climbing into the green right now. That news is that OPEC Plus, there were rumors that there were going to meet early this week, but maybe that that's not going to happen anymore. Maybe there's not going to be a June meeting in which case the production cuts would roll off next month in July. The reason being Iraq and Nigeria have been cheating on their quotas, and unless they get back in line, this could derail the oil rally.

But having said that on the flip side, the demand side, as we were talking about over the last few days, China, some of the numbers have been picking up there. I think their services PMI became a rose for the first time in four months, so that is a bullish headwind for crude. Now, also taking a look at the US dollar, which you mentioned, this is now down the fifth day in a row. This would be the US dollar index heavily weighted toward the euro.

Now, we can see it just trending down over the last five days. Now on a year to day basis, still largely going sideways, but just kind of breaking down right now. Now, the dollar is kind of famous for giving a lot of head fakes. We had one in March where it broke to the upside and subsequently reversed, so we'll have to see where this goes. But a weaker dollar is good for emerging markets, and it's good for the risk of an environment in which we are right now.

ALEXIS CHRISTOFOROUS: All right. Thanks, Jared. Also this just crossing the wires now, the CBOE global markets, their trading floor, they're not going to reopen until June 15. And we know, of course, the New York Stock Exchange floor reopened just about a week ago after being shop closed for about two months, but of course at a much more reduced rate. There are many fewer traders on the floor. Michael, we're seeing a lot of investors flock to some of the hardest hit areas. I'm talking about materials, energy, industrials, sort of those cyclical sectors. Should investors be a little bit more defensive here with their portfolios?

MICHAEL LEE: No, look, I think as the Fed comes in and they start buying treasury bonds and then they start-- that frees up balance sheets for the banks, because those treasury bonds need to seat somewhere. They either sit with the dealer or they're going to sit with the Fed. Now, if they're sitting with the Fed, it allows these large commercial money center banks to be able to have capital for corporations for their money lines as well as to buy risk assets, OK? And then what you see from there is a cascading effect to all other risk assets.

And now as that moves into risk assets, you start to, you know, that cyclical trade that you're going to get in basics, industrials, energy. These things that happen at the beginning of the turnaround are start to come in favor. And as Jared was talking about, some of the emerging markets are going to start to come into favorite too. So what you're seeing right now is the bottom of a business cycle happening in ultrafast time.

So I like to think about the business cycle like a clock. So if 12:00 was the middle of February, 6:00 was the middle of March, and you could move around that clock very quickly. But at different points on that clock, the same things happen. So that cyclical trade, the emerging market trade, all these things are starting to come into favor.

Now, I will always own a portion of my portfolio in 30 year treasuries in case something does happen, in case there's some sort of war, these protests go off the rails, or the president does this or that. So you're always going to own protection in the form of a 30 year treasury, especially while the Fed's buying bonds. But I think the cyclical trade makes a ton of sense right now, and look, if this is anything like the last one, we're off the races for the next five to 10 years. There'll be some hiccups along the way, but this is the way markets work.

BRIAN SOZZI: Michael, the civil unrest we're seeing in the country, don't you think that's also an economic event? And if it is, why isn't the market pricing in it?

MICHAEL LEE: So, you know, I'd say it's a good economic event. It's bad for those whose stores are getting smashed and the property who is getting destroyed, but the flip side of that, it's showing us that we can open up and that these lockdowns have gone on for too far and too long. 15 days to slow the spread is not hide under your mattress for a year until we find a cure. So the economy is going to start opening up very quickly. In the midst of this, one of the most restrictive states, Michigan, pull back their emergency declaration and they're starting to open up that state dramatically over the next few weeks.

I think it'd be smart for a lot of governors to just reverse course now and say, look, we've done our job, we've protected as many people as we can, but we need to get back to, you know, we need to get back to a normal way of life. I think that's coming sooner rather than later, and so I think you know while it would be terrible if you own a store or you own a shop that was defaced, but I say the flipside of that is we can open up. This country can get back to work, and as we get back to work, you know, there's fiscal stimulus that is work, there's monetary stimulus that's working, and we're ready to go.

ALEXIS CHRISTOFOROUS: All right, we're going to be-- we're ready to go, Michael. Michael Lee.

[LAUGHTER]

Michael Lee Strategy. Thanks for being with us.

BRIAN SOZZI: Thanks so much, guys.