Another Dead Cat Bounce, We Haven't Bottomed Yet, Goldman Predicts S&P 2000

posted Mar 30, 2020, 8:35 PM by Intelligent Investor
The Dow Jones has rallied to 22,327 over the past several days. However, we believe this is another dead cat bounce. We sold all our shares of United Health Group (UNH). The stock just got an upgrade from Deutsche Bank, so the stock has had a massive interim rally. We took this rally as an opportunity to sell our holdings in this company.

The number of coronavirus infection in the United State has now outpaced the rest of the world. This means more people are going to get sick or die. Our healthcare system may tither on the brink of collapse. This creates a lot of risk for us to hold shares in UNH. We are expecting this stock to head lower as the company announces their earnings forecast on April 15, 2020, which is only a couple of weeks away. Even if this stock continues its surge higher, we would expect this surge to be short lived. Reality will set in with UNH's investors; the coronavirus isn't going away anytime soon.

The worst-case estimates for coronavirus deaths is anywhere between 200,000 to 1.7 million. And that is a lot of money to pay out for a health insurance company like United Health Group (UNH). We are expecting their earnings to take a hit and their dividends may not be safe. We expect a dividend cut if so many people die and get infected with coronavirus. We will just buy the stock back when it bottoms out sometime in the future.

According to the St. Louis Fed projections, the unemployment rate may go up to 32%. If the unemployment rate shoots upwards to 32%, people will be withdrawing money from their 401K, IRA, etc., to make ends meet. So, how could this rally be real? We are still a long way from reaching the bottom. Any rally at this point is nothing but a mere dead cat bounce. In other words, it is a false rally.

We are not alone in thinking we haven't hit bottom yet. Goldman and Sachs, Charles Schwab, and other investment banks are also seeing a steeper drop coming in the horizon. Goldman and Sachs is predicting the S&P 500 will drop to 2,000 by the middle of the year. To us, this sounds more like the best-case scenario. We believe it the S&P 500 will go much lower than that.