SOCIETE GENERALE: Stocks are riding a fleeting rally before fundamentals collapse and 'the real bear market begins'

• Major US indexes recently rebounded into bull-market territory. But precedent suggests stocks will fall further as the US slides into a lengthy recession, Societe Generale said in a Thursday note.
• The stock market is in the middle of a brief bear-market bounce mirroring gains made in October 2008 before the financial crisis pulled equities down another 25%, strategist and long-time bear Albert Edwards said.
• Downward pressure from low inflation and a near-term recession stand to make the virus-induced profit slump deeper than past declines, he added.
• Many investors are poised to reenter the market "only to be crushed as history suggests is normal," Edwards wrote.
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Equities may have technically returned to bull-market territory, but Societe Generale sees the uptick as a precursor to deeper lows.

The benchmark S&P 500 is fresh off its biggest weekly gain since 1974 following a shortened week. The index got a lift on Thursday as fresh Federal Reserve aid lifted investors' spirits. The recent gains follow nearly two months of sharp selling amid fears of a coronavirus-fueled recession.

That market trajectory matches past trends, SocGen strategist and long-time bear Albert Edwards wrote in a Thursday note.

The recent rally is "nothing more than an early stage, bear market rally - before the real bear market begins," he said.

Edwards argued that the retracement seen through early April mirrors the temporary bounce seen in October 2008, before the financial crisis pulled equity prices another 25% lower.

"In relation to what is likely to be a very deep recession, the equity market and the yield curve have hardly moved at all - yet," Edwards said.

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The coronavirus immediately tanked markets as investors feared business closures and a sharp decline in demand would tear into revenue streams. The more forward-looking issue is a significant profit slump, Edwards said.

He notes that each progressive recession has posted a bigger drop in corporate profits, and a slow economic reboot from the virus lockdown risks long-term earnings weakness.

Stocks already hitting their bottom would be "incredible," Edwards said. A critical piece of SocGen's "Ice Age" thesis calls for the profit cycle to grow more volatile as deflation erases more corporate profits during each recession. Traders may be able to ignore long-term economic consequences in their value-buying, but precedent holds the market will bite back before starting a more sustainable rally, he said.

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"Can this current rally really mark the end of the equity bear market as many investors hope or will FOMO (fear of missing out) suck investors in, only to be crushed as history suggests is normal," Edwards said.

Investors should also prepare for a more dire deflationary shock, Edwards added. Core inflation ran relatively low for years despite a historically long economic cycle, and the strategist anticipated the next recession would bring falling year-over-year negative inflation, or deflation.

While the coronavirus outbreak - and likely recession - is an unexpected global event, a sharp instance of deflation is a frightening possibility.

"It is a big ask to expect investors to try to look through these events and shrug them off - perhaps more so for negative prints of core [consumer price index] than a profits slump," Edwards wrote, adding negative 10-year Treasury yields may be on the horizon as investors flock to safer assets.

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