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Authored by Lance Roberts via RealInvestmentAdvice.com,

Market Corrects As COVID Cases Surge

Three overriding catalysts were driving the correction this past week:

1. The market had gotten a good bit ahead of fundamentals.

2. The surge in COVID cases is undermining the V-Shaped recovery narrative.

3. End of the quarter portfolio rebalancing, which managers postponed in March.

We will go through each of these in more detail. However, let’s start with where we left off last week and update our risk/reward ranges.

Currently, the risk/reward dynamics have become slightly less favorable. The good news is that the 50-dma and 200-dma are so close there is strong support short-term. Such should give the bulls a bit of optimism. However, a breakdown below that level and things will get ugly quickly.

• -2.2% to consolidation highs vs. +3.1% to the top of the current downtrend. (Positive)

• -8.9% to previous consolidation lows vs. +7.7% to previous rally peak (Negative)

• -13.1% to March bounce peak vs. +12% to all-time highs. (Negative)

• -18.4% to April 5th lows vs. +12% to all-time highs. (Negative)

As shown, with the sell-off on Friday, the short-term oversold condition, a reflexive rally next week would not be surprising. Given that COVID concerns are escalating, it may be wise to use any rally to reduce risk further and increase hedges.

The Market Is Well Ahead Of Fundamentals

Part of the correction over the last two weeks is coming partially from the realignment of stocks back to reality. We specifically mentioned some of the more visible issues last week, but it was interesting to watch the “Daytraders Favorites” crash back to Earth (No pun intended.)

As we addressed on Tuesday, it is hard to justify paying current valuations.

“Furthermore, given the depth of the economic crisis, 49-million unemployed, collapsing wages and incomes, and a resurgence in the number of COVID-19 cases, estimates are still too high. During previous economic downturns, earnings collapsed between 50% and 85%. It is highly optimistic, given the current backdrop, that earnings will only decline by 20%.”

6 Downside Risks

With States now beginning to back off of reopening plans, it is highly likely current earnings estimates will need to be guided lower over the next couple of months.

The most significant risk to investors currently is a “reliance on certainty” about future outcomes, when, in reality, there is no certainty at all. As Mike Shedlock pointed out just recently, there are numerous risks still present.

Six Downside Risks 

1. The future progression of the pandemic remains highly uncertain.

2. The collapse in demand may ultimately bankrupt many businesses.

3. Unlike past recessions, services activity has dropped more sharply than manufacturing—with restrictions on movement severely curtailing expenditures on travel, tourism, restaurants, and recreation and social-distancing requirements and attitudes may further weigh on the recovery in these sectors. 

4. Disruptions to global trade may result in a costly reconfiguration of global supply chains. 

5. Persistently weak consumer and firm demand may push medium- and longer-term inflation expectations well below central bank targets.

6. Additional expansionary fiscal policies— possibly in response to future large-scale outbreaks of COVID-19—could significantly increase government debt and add to sovereign risk.”

Again, the market is trading well ahead of underlying fundamentals. While the “Fed Put” may indeed put a “floor” below stocks, that doesn’t mean they can’t correct to realign with economic and fundamental realities.

COVID Makes A Second Appearance

As we discussed previously, the market rallied from the March lows based on 4-underlying premises:

1. There would be no second-wave of the virus.

2. There would be a vaccine available by year-end. 

3. The economy would fully recover back to pre-pandemic levels.

4. And, of course, “The Fed.”

While the bullish fantasy indeed prevailed over the last couple of months, suddenly, the world has shifted. The hope was that cases in the U.S. would slow into the fall before the potential onset of a “second wave” during a more traditional “flu season.” Unfortunately, the spike in cases in the still ongoing “first wave” will delay economic recovery longer.

In Texas, where I live, the Governor has shut-down bars again, is keeping businesses at reduced capacity, and potentially will reverse more if needed.

My wife went to the doctor recently for a test, and she received the “ole’ swap up the nose.” While the test came back negative. The doctor told my wife that COVID lives in the lungs and not the nasal cavity. Therefore, while her test was negative, it could be a false negative. If the doctor is correct, the real numbers of infected could be 10x higher. Such confirms a recent Reuters article:

“Government experts believe more than 20 million Americans could have contracted the coronavirus, 10-times more than official counts, indicating many people without symptoms have or have had the disease, senior administration officials said.

The estimate, from the Centers for Disease Control and Prevention, is based on serology testing used to determine the presence of antibodies that show whether an individual has had the disease, the officials said.”

If true, the ramifications could substantially impair the bullish thesis.

Timing Couldn’t Be Worse

Without a bill to extend more Federal Aid via Payroll Protection Programs and increased unemployment benefits, the ongoing restriction on trade will likely lead to a further surge in bankruptcies and layoffs.

“According to Bloomberg data, no less than 13 U.S. companies sought bankruptcy protection last week, matching the global financial crisis’s peak. The filings, led by the perennially weak consumer and energy sectors, were the most for any week since May 2009.”

There is a virtual spiral between job losses and bankruptcies. As more individuals lose their jobs, they have less to spend. Since consumption is what drives earnings for businesses, they have to lay off workers to stay in business. Pay attention to the “continuing claims,” which will tell the story of the economic recovery. (That doesn’t look like a “V”)

End Of The Quarter Rebalancing

There was one other factor which has weighed on stocks this past week, which was noted recently by Zerohedge:

“When adding all the other possible sources of the month- and quarter-end forced rebalancing, the total amount ‘for sale’ soars to an unprecedented $170 billion according to calculations by JPMorgan.

In the latest Flows and Liquidity report from JPM’s Nikolas Panagirtzoglou, writes that after correctly pointing out at the market lows on March 23rd that there is a massive $1.1 trillion in rebalancing flow into equities, all of that has since balanced out, and three months later, we are looking at a substantial outflow of about $170BN before month-end, resulting in a ‘small correction.’”

This rebalancing of portfolios was postponed by pension and mutual funds in March as they did not want to sell at market lows. That decision worked out well then, but now they need to rebalance portfolios by selling equities and buying bonds. We can see this action by looking at the performance between the S&P 500 index and Treasury Bonds over the last two weeks.

This rotation is either likely close to completion, or will complete early next week. As we stated previously, this is why we hedge our equity portfolios with fixed income. The risk offset reduces downside volatility and allows the portfolio to weather tough patches in the market.

With the market very oversold short-term, it would not be surprising to see a reasonably decent reflexive rally into the start of July. However, that rally will likely be an excellent opportunity to rebalance risk and rethink exposures accordingly.

Portfolio Positioning Update

As stated last week, with our portfolios almost entirely allocated towards equity risk in the short-term, we remain incredibly uncomfortable.

Our positioning in fixed income and gold has hedged the portfolio against the latest decline in the very short-term. Still, with the market getting very oversold short-term, as shown below, we expect a reflexive rally off of current support next week.

Most likely, we will use any counter-trend bounce to reduce equity risk a bit, rebalance exposures, and focus our attention on capital preservation for the next couple of months. With the virus resurfacing, the potential risk of disappointment to the earnings and economic recovery story has risen.

While it is easy for the mainstream media to write articles and post comments about the markets, it is an entirely different matter when you manage money. Currently, there is a battle raging between the fundamental and “hope” driven narratives.

On the one hand, it’s easy to see the fundamental problems in the market and the economy, which argues for much less risk exposure. However, on the other, you have the Fed and a Government, ready to throw money at, and “jawbone,” the markets at a moment’s notice.

Trying to navigate the two is like trying to thread a needle, in a moving car, on a bumpy road, with your eyes closed. Given we aren’t prescient, we will have to resign ourselves to doing the best job we can for our clients with the information we have available.

That is a fancy way of saying, “we are going to give it our best guess.”

The goal remains the same as always, protect our client’s capital, reduce risk, and try to come out on the other side in one piece.

Sometimes, however, it just gets messy.

Authored by Jonathan Turley,

Below is my column in The Hill on the ongoing destruction of memorials and statues. After this column ran, I learned that one of the iconic busts of George Washington University had been toppled on my own campus. I did not learn that from our university, which was conspicuously silent about this destructive act at the very center of our campus.  There is something eerily familiar in the scenes of bonfires with police watching passively as public art is destroyed.  Such acts are akin to book burning as mobs unilaterally destroyed images that they do not want others to see.  There are valid issues to address on the removal of some public art but there is no room or time for debate in the midst of this spreading destruction.  The media has largely downplayed this violence, including little comparative coverage of an attack on the Democratic state senator who simply tried to videotape the destruction of a statue to a man who actually gave his life fighting against slavery in the Civil War.  As discussed earlier, history has shown that yielding to such mob rule will do little to satiate the demand for unilateral and at times violent action. People of good faith must step forward to demand a return to the rule of law and civility in our ongoing discourse over racism and reform.

The scenes have played out nightly on our television screens. In Portland, a flag was wrapped around the head of a statue of George Washington and burned. As the statue was pulled down, a mob cheered. Across the country, statues of Christopher Columbus, Francis Scott Key, Thomas Jefferson, and Ulysses Grant have been toppled down as the police and the public watch from the edges. We have seen scenes like this through history, including the form of mob expression through book burning.

Alarmingly, this destruction of public art coincides with a crackdown on academics and writers who criticize any aspects of the protests today. We are experiencing one of the greatest threats to free speech in our history and it is coming, not from the government, but from the public. For free speech advocates, there is an eerie candescence in these scenes, flames illuminating faces of utter rage and even ecstasy in destroying public art. Protesters are tearing down history that is no longer acceptable to them. Some of this anger is understandable, even if the destruction is not. There are statues still standing to figures best known for their racist legacies.

Two decades ago, I wrote a column calling for the Georgia legislature to take down its statue of Tom Watson, a white supremacist publisher and politician who fueled racist and antisemitic movements. Watson was best known for his hateful writings, including his opposition to save Leo Frank, a Jewish factory manager accused of raping and murdering a girl. Frank was taken from a jail and lynched by a mob enraged by such writings, including the declaration of Watson that “Frank belongs to the Jewish aristocracy, and it was determined by the rich Jews that no aristocrat of their race should die for the death of a working class Gentile.”

Yet today there is no room or time for such reasoned discourse, just destruction that often transcends any rationalization of history. Rioters defaced the Lincoln Memorial in Washington and a statue of Abraham Lincoln in London. Besides attacking those monuments to the man who ended slavery, rioters attacked statues of military figures who defeated the Confederacy, like Grant and David Farragut, who refused to follow Tennessee and stayed loyal to the Union. In Boston, rioters defaced the monument to the 54th Massachusetts Infantry, the all black volunteer regiment of the Union Army. In Philadelphia, the statute of abolitionist Matthias Baldwin was attacked, despite his fight for black voting rights and his financial support for the education of black children.

This systematic destruction of public art is now often rationalized as the natural release of anger by those who have been silenced or marginalized. Even rioting and looting has been defended by some as an expression of power. However, a far more extensive movement is unfolding across the country, as people are fired for writing in opposition to these protests. In Vermont, Windsor School principal Tiffany Riley was placed on leave for questioning protest rhetoric on Facebook, where she posted, “While I understand the urgency to feel compelled to advocate for black lives, what about our fellow law enforcement?” She was denounced on social media as “insanely tone deaf” and is being forced to retire.

At the University of Chicago, there is an effort to fire Harald Uhlig, who is a professor and senior editor of the prestigious Journal of Political Economy. His offense was questioning the logic of defunding the police and other messaging from the protests. Writers like Paul Krugman of the New York Times denounced him, and he was accused of the unpardonable sin of “trivializing” the Black Lives Matter movement. Professors across the country are being targeted because they object to aspects of these protests or specific factual claims. Students also face punishment.

Syracuse University student journalists at the Daily Orange have fired a columnist for writing a piece in another publication that questioned the statistical basis for claims of “institutional racism” in police departments. Adrianna San Marco discussed a study published last year by the National Academy of Sciences that had found “no evidence” of disparities against Blacks or Hispanics in police shootings. Such a view could be challenged on many levels. Indeed, this once was the type of debate that colleges welcomed. Yet San Marco was accused of “reinforcing stereotypes.”

The merging of journalism and advocacy is evident in academia, where intellectual pursuit is now viewed as reactionary or dangerous. Many opposed a recent recognition given by the American Association of University Professors to an academic viewed by many as antisemitic. I disagreed with the campaign against the professor as a matter of free speech. However, I was struck by the statement that she “transcends the division between scholarship and activism that encumbers traditional university life.” That “encumbrance” was once the distinction between intellectual and political expression. As academics, we once celebrated intellectual pluralism and fiercely defended free speech everywhere.

However, we now increasingly join the mob in demanding the termination or “retraining” of academics who utter opposing views. In my 30 years of teaching, I never imagined I would see such intolerance and orthodoxy on campuses. Indeed, I have spoken with many professors who are simply appalled by what they are seeing but too scared to speak up. They have seen other academics put on leave or condemned by their fellow faculty members. Two professors are not only under investigation for criticizing the protests but received police protection at home due to death threats. The chilling effect on speech is as intentional as it is successful.

Such cases are mounting across the country as academics and students enforce this new orthodoxy on college campuses. What will be left when objectionable public art and academics are scrubbed from view? The silence that follows may be comforting to those who want to remove images or ideas that cause unease. History has shown, however, that orthodoxy is never satisfied with silence. It demands speech.

Once all the offending statues are down, and all the offending professors are culled, the appetite for collective suppression will become a demand for collective expression. It is a future that is foreshadowed not in loud cries around the bonfires we see every night on the news. It is a future guaranteed by the silence of those watching from the edges.

Despite that Gen. Khalifa Haftar’s year-long offensive to take the capital was recently was defeated and ultimately pushed back, his Libyan National Army (LNA) still controls most of the country’s major oil fields. 

The Benghazi-based commander has for years secured all oil fields especially in the eastern half of the country, even as Libya’s official National Oil Corporation (NOC) is based in Tripoli and operates under the aegis of the UN-backed Government of National Accord (GNA). 

Haftar has long used this “oil weapon” by threatening to impose a total blockade on exports. Recall that in late January and into February of this year he did just that, declaring a “catastrophic” blockade of oil fields taking output down to almost zero in order to starve Tripoli and the NOC of vital state revenues, which has continued to now.

With his dream of seizing Tripoli dashed, thanks in no small part to Turkey’s providing significant military support to the GNA, the oil blockade appears to in force more severely than ever, but this time reportedly with Russian help.  

Since last year it’s been widely reported that Russian mercenary firm, the Kremlin-based Wagner Group, is embedded with pro-Haftar forces. But this latest development via Reuters on Friday will certainly raise eyebrows in Europe and Washington. The NOC is now charging that Russia is meddling in its domestic production: 

Libya’s National Oil Corporation (NOC) said on Friday Russian and other foreign mercenaries had entered the Sharara oilfield on Thursday to block the resumption of energy exports after a months-long blockade by eastern-based forces.

Most of Libya’s main oilfields are under the control of the eastern-based Libyan National Army (LNA), which has fought alongside Russian mercenaries according to the United Nations.

This after the NOC tried to restart production at Sharara earlier this month following pro-Tripoli forces pushing the LNA back from the outskirts of the capital, which witnessed fierce fighting for months. 

“While foreign mercenaries continue to be paid vast sums of money to prevent the NOC from carrying out its essential duties, the rest of the Libyan population suffers,” corporation chairman, Mustafa Sanalla said.

He called the loss in revenue, which most reports starting months ago estimated at $6 billion as leading to the “disastrous decay of our oil infrastructure.”

Kremlin-based Wagner Group security contractors have long been reported on the ground in Syria supporting Assad, and more recently – since last year – even in Libya supporting pro-Haftar forces.

Oil stoppage has military implications on the ground, given the GNA’s national army relies on the country’s oil revenue to purchase weapons via Tripoli’s central bank.

It remains further that oil exports make up over 90% of Libya’s national revenue, and again Haftar has long held the majority of the nation’s oil fields. Trump a year ago even personally “thanked” Haftar for “securing Libya’s oil” amid a lawless war-torn situation. 

Since then US policy vis-a-vis Haftar has been confused and unclear, with moments of Washington coming close to expressing outright support, while it remains that US officially and formally recognizes the Tripoli GNA under PM Fayez Mustafa al-Sarraj.

After two consecutive weeks of declines in the Fed’s balance sheet, the stock market has started to look especially wobbly, and after several days of steep declines, all June gains have vaporized.

Of course correlation isn’t causation, and the prevailing narrative is that the market weakness has been due to a spike in coronavirus cases across sunbelt states and fears that the V-shaped recovery is not coming, although as we have repeatedly said, the Fed will urgently need to expand its QE which is now running at “only” $80BN per month for TSYs, an amount that will be insufficient to monetize the flood of new debt in the coming years. To do that, however, the Fed needs a “shock” pretext to resume aggressive balance sheet expansion and a “second wave” is just that.

So while we wait for the media narrative to “confirm” that the next escalation in the pandemic has arrived and is forcing states to resume shutdowns, it is hardly a surprise that on Wall Street strategists are taking a step back and after bearish projections virtually disappeared in the past month, discussions of a bear market rally are once again front and center with BofA’s Michael Hartnett taking the lead. According to the BofA CIO, while Q2 is on pace to be the best quarter for the S&P500 and oil in 50 years…

… a rebound largely driven by reopening optimism (“Mar 20th NY lockdown – SPX 2304; Jun 8th NY reopening – SPX 3232″), it’s time to admit that the furious 50-day, ~40% rally may have been nothing more than a bear market rally.

To put it in context, Hartnett shows that the current rebound has largely been following the trajectory of the three “greatest bear market rallies of all-time” (1929, 1938, 1974), which would put the S&P at 3300-3600 sometime between Aug & Jan’21, but what follows would be a far more painful move lower, as was the case after all these bear market rallies fizzled resulting in lower lows.

Hartnett is not the only one trying to predict how the bear market rally dies. Leuthold Group’s CIO, Doug Ramsey, who in March told his clients to sit out what’s coming and thus missed the $10 trillion surge in market cap, has a message: it ain’t over yet.

“The bulls could be proved right in that the March 23rd low holds, but you could lose a lot of money in a drawdown here,” said the Leuthold chief investment officer. “You could still very easily have a drop of 20% from the peak we made on June 8th. Very easily.”

As Bloomberg notes, “the warning reflects a wider schism on Wall Street these days. Many of the bears whose jaws dropped over the resiliency of stocks remain steadfastly skeptical, awaiting the moment of vindication. Meanwhile, early believers are running victory laps, doubling down on the rally on the theory skeptics will have to capitulate and stimulus will continue to flow.”

But what may be the single most beneficial aspect of the recent Fed-fueled ramp which saw the central bank inject or backstop nearly $8 trillion (and counting), is that technical analysis has finally been thrown out of the window, and “by now, everyone’s aware there’s no moment of the past that can be used as a template to tell which way stocks will lurch next.“

Just days before the March 23 bottom, Ramsey cautioned clients that it was “too early” to expect a major bear market trough, as a phase would come when stocks and economic data fell in tandem. A study by the firm showed that on average, over 11 past recessions, stocks didn’t start to recover until 1 1/2 years after the economy started contracting. Little did he know that on March 23 the Fed would toss all the playbooks, and go so far as to break the law by creating a SPV in collaboration with the Treasury that would allow it to buy corporate bonds… a similar approach that will soon give it the ability to buy stocks after the next crash.

It wasn’t just Leuthold: Barclays strategists mapped out a scenario where an extended recession could lead to a 50% peak-to-trough selloff. The farthest the S&P 500 ever fell was 34%. Goldman was expecting a second wave of selling to push the S&P below 2,000. Northern Trust Wealth Management pointed out that it typically takes about 1 1/2 years to recover from a 20% drop. Instead, the S&P 500 rose 40% in 50 days, the fastest rebound in nine decades. Anyone who tried to use 2008 as a road-map was badly burned.

In other words, we are – and have been – in truly uncharted territory, where the only thing that matters is what the Fed does next. Of course, we can make some educated guesses as to what comes next, and as we have been claiming for months, the Fed needs another crash to unleash even more helicopter money and further take over capital markets. After all, it already controls most of the bond market where Treasurys no longer have any signaling power whatsoever; as such the Fed will soon need a stock market crash to fully take over equities next by following the BOJ and SNB in purchasing ETFs, and eventually single stocks. That’s why when looking, ahead one has to think not like a financial strategist but a central bank criminal whose only purpose is accelerating the wealth transfer from the middle class to the 0.01% while avoiding the inevitable coming systemic reset.

For now, however, Ramsey isn’t alone in claiming “it’s too early to say” calls for further downside were wrong. As Bloomberg notes, economists at TS Lombard remain bears, expecting a drop of at least 20%. Still, they’ve dropped their March call that the S&P 500 would fall below 2,000 over the summer. Incidentally so did Goldman which now is expecting the S&P to trade around 3,000 by year end, and while JPMorgan expects a correction due to quarter end rebalancing, the bank last twekk finally upgraded stocks to Overweight, telling its clients to buy… just as the record bear market rally was about to end.

Because while the market may have changed – or rather died thanks to the Fed – one thing that will never change is that for Wall Street to prosper it needs fools who are willing to play its game.

As we noted last night, the US recorded a third record jump in new COVID-19 cases, helped along by a staggering ~9k newly confirmed cases out of Florida, which finally pushed the state’s governor, Ron DeSantis, to shut down bars, following the lead of Texas Gov Greg Abbott, who said last night that if he could have done one thing differently, he wouldn’t have reopened the bars so quickly.

Nationally, more than 44k new cases were reported today. That’s the third straight record day. pic.twitter.com/ahY6WvRLC6

— The COVID Tracking Project (@COVID19Tracking) June 26, 2020

“f I could go back and redo anything, it probably would have been to slow down the opening of bars…” Abbott said during an interview with the local Texas press Friday evening. He added that the bar setting “in reality, just doesn’t work with a pandemic…”

Dr. Fauci joined the chorus of experts warning that it’s only a matter of time before deaths start increase in line with the new case totals. But on Friday, the 7-day national average for daily deaths reported continued to decline day over day.

States reported 619 deaths.

The 7-day average fell to 556. pic.twitter.com/FoymaF05NK

— The COVID Tracking Project (@COVID19Tracking) June 26, 2020

DeSantis, on the other hand, drew the ire of Bloomberg and the increasingly-critical mainstream press after he snapped at a reporter. When asked if he would have done anything differently, he defiantly responded “like what?” That…probably wasn’t the best reaction from an optics standpoint, especially now that his state has kicked off the weekend with another record jump in new cases, suggesting that the US might be on track for a fourth-straight record jump as the outbreak in 16 states mostly along the American sun belt (encompassing most of the south and west) worsens.

Florida reported 9,585 new coronavirus cases, another 7.8% increase (in line with the percentage increase seen in the last few days). That’s compared with 8,942 cases reported yesterday. It was the second record jump in a row for the state.

Florida’s new state totals include:

• 132,545 cases
• 14,136 Floridians hospitalized
• 3,390 deaths of Florida residents

Testing continued to climb across the US, even as the number of new confirmed cases far outpaced the increase in testing, as even VP Mike Pence acknowledged last night.

The situation is getting worse in Florida, if that’s even possible. More than 9,500 new cases reported today. WOW. pic.twitter.com/z70cGDUeNw

— Charles Ornstein (@charlesornstein) June 27, 2020

The percentage of positive tests, a new critical metric that is being closely followed by investors and epidemiologists alike, has continued to climb in many of the hardest-hit states.

This chart looks at per-capita testing rates and the percent positive. Arizona is all by itself, but South Carolina and Florida are moving rightward. pic.twitter.com/H1Yl7VxzIA

— The COVID Tracking Project (@COVID19Tracking) June 26, 2020

South Florida, particularly Miami-Dade County, remains the worst-hit part of the state, reporting roughly a quarter of the statewide total.

Source: FLA Dept of Health

Hours after Gov DeSantis ordered bars closed, Miami-Dade Mayor Carlos Gimenez announced late Friday that he would shut the city’s most popular beaches for the Independence Day holiday weekend, probably the most aggressive step, economically speaking, as the weekend is typically a busy one during an otherwise slow summer season.

Gimenez said in a statement that the five-days suspension starting July 3 would be extended “if conditions do not improve.”

After consulting with our County’s public health experts, I will be signing an emergency order on Saturday to close all beaches in Miami-Dade County starting Friday, July 3, and ending Tuesday, July 7. More info: https://t.co/oSgkrB8CrS pic.twitter.com/CydnVmljz5

— Mayor Carlos A. Gimenez (@MayorGimenez) June 27, 2020

Internationally, Brazil and Latin American continue to contribute more to the global total as the great rebound continues. Even Europe saw cases rise for the second straight week as easing lockdowns have led some local officials to reinstate strict social distancing rules and even lockdowns. Though, per capita, Arizona alone is still outpacing every European country, including Italy, Spain and the UK.

The last week of June marks the time when investors lost hope for a V-shaped economic recovery as confirmed COVID-19 cases are exponentially rising in Texas, Florida, and California, and the Tri-state area imposed quarantine restrictions on travelers. Reopening in some of these states has also been delayed as retailers close up brick and mortar shops for a second time. 

With that being said – the V-shaped recovery narrative is imploding – as many on Wall Street indiscriminately bought stocks (some used picking Scrabble letters to buy) as their belief in the Federal Reserve’s money-printing would lift the economy out of one of the worst downturns since the 1930s. 

Though the economy was never lifted in a V-shaped formation, instead, the stock market rose to new highs as wreckless financial speculation led to an army of Robinhood daytraders buying bankrupted companies. 

With the euphoric period likely behind us, notably, because the Fed’s balance sheet has contracted over the last several weeks and virus cases across the country are soaring – we now turn our attention to the commercial real estate bust. 

During euphoric periods, like what’s happened over the last several months in financial markets, the bad news is usually overpowered with happy stories (sometimes from Larry Kudlow) – but as sentiment shifts – we must not lose track of the instabilities that can wreck the financial system.

Bloomberg cites a new report via real estate research firm Savills, which details how the Manhattan commercial real estate industry could be headed for a prolonged downturn if there’s no V-shaped recovery in the economy. 

The report says Manhattan’s office rents are likely headed to their lowest levels since 2012, that is if the economy doesn’t have a speedy recovery. That means asking rents could drop by 26% to about $62.47 a square foot, the real estate services firm said. 

A speedy recovery or not – the trend in corporate America is to work from home – companies have found ways to implement remote access for employees – and this trend will only gain momentum. 

That being said, the office market in New York City is headed for a serious bust – with recovery years away. 

“Many assume that when the stay-at-home measures are lifted, there will still be Covid-19 fears that will continue to materially influence behaviors and the economy,” Savills said. “These fears will likely remain until a vaccine or antibody therapy is developed and widely available, which experts currently estimate is at least 12 months away.”

It’s not just the office market that is in trouble – we noted this week that one-third of hotels in the city could go bankrupt. 

The cracks in commercial real estate have already emerged, in early June, there was a massive jump in CMBS delinquencies, suggesting the bust has only begun. 

For more clarity on the recovery timeframes – UCLA Anderson Forecast’s latest report suggests 2023.