On that note, as stocks continue to rise, what's the appropriate multiple on a stock market where rates are zero, and where the Fed is a buyer of practically any asset that could become threatening to the economy (which already includes corporate bond ETFs, and would likely include broader stocks, if an unstable stock market became a risk)?

The answer is, the P/E on stocks can go much higher.  

Remember, Warren Buffett made this point a few years ago, about stock market valuations in zero interest rate environments:  He said when interest rates were 15% [in the early 80s], there was enormous pull on all assets, not just stocks.  Investors have a lot of choices at 15% rates.  It's very different when rates are zero. He said, in a world where investors knew that interest rates would be zero "forever," stocks would sell at 100 or 200 times earnings because there would be nowhere else to earn a return.  

We don't have a "forever" commitment from the Fed (thankfully), but the Fed has vowed to wait until recovery proves to be sustained, before they will start moving rates — i.e. they will let the economy run hot.  

At the moment, the P/E on forward earnings (estimates on S&P earnings over the next 12-months) is 21.8.  That's on an earnings estimate that has been dialed down dramatically (on what is a pure guess from Wall Street). 

As we've discussed in the past, when you have an environment like this, corporate America will always take the opportunity to put all of the bad news and bad scenarios on the table.  If there's a write-down opportunity on an underperforming asset, now is the time to take it.  It all resets the earnings expectations bar to a very low level, which makes it easy to step over (i.e. to beat).  

But even if we assume the big earnings drawdown that Wall Street is projecting, and even if we remove zero rates from the argument, the average P/E on the S&P 500 is still cheap relative to the average P/E of the past 21 years (which is 25.4). 

Plus, consider this: The valuation on stocks tends to run well above average, coming out of recession.  Coming out of the 2001 recession, the P/E on the S&P 500 was 46.  

With that, if we assumed a 20% decline in S&P 500 earnings and put a 30 multiple on it, we would have something around 4,200 in the S&P 500.  That’s 32% higher than current levels.  

This is what you get when you turn demand on, like a light switch (lifting stay-at-home orders), and that demand is met with a supply chain disruption.

With that, I've been waiting to see the very important inflation component of this report (the ISM prices paid), which came in this morning.  

It was indeed a hot number.

In an economy where economists are forecasting a contraction for the second quarter, of anywhere from down 35% to down 45%, the price that manufacturers pay for raw materials in June had a huge jump. 

That leads to this index that shows buyers are no longer in the position of strength to negotiate on price.  And I suspect it's going to get a lot worse for them. 

I suspect we will continue to see the positive surprises roll in (related to jobs and demand), against a low expectations bar.  But with some key inflation data also in the mix, we may see the attitude begin to shift on the inflation outlook.  

With that, let's hear from the front lines on what this rise in cases looks like. 

On Tuesday, the head of Orlando Health, a network of Central Florida hospitals did a press conference with the Florida governor.  Here are four very important takeaways: 

1) First, as the governor said, the median age of new cases is 35 in Florida.  Early in this crisis, it was low 60s.  [my comment: As we discussed yesterday, as young people are being forced to test before returning to work, we're beginning to see how expansive the asymptomatic population might be.] 

The remaining points were made by the hospital exec: 

2) Hospitalizations are rising, but it's in part to their treatment protocol (Remdesivir) which is an infusion therapy and it requires a long hospital stay to complete the therapy.  Hospitalization numbers are reported as current, not new daily changes, so the longer stays results into higher numbers.  As he said, "there is an impact to the numbers that accumulate, as far as our inpatient count."  

3) "20% of the COVID positive patients in the hospital were in the hospital for things completely unrelated to COVID. It could have been a broken leg, it could have been a gunshot wound." [my comment: more asymptomatics]

4) Finally, and most importantly, the hospital exec said, back in April 50% of their COVID patients were on ventilators.  Today, it's just 3%.

So, we have some context for the data.  With this, we should expect expect cases to continue to move higher.  We should expect many, many more asymptomatic case diagnosis as young people continue to be forced to test (work, school).  We should expect the hospitalization rate (relative to cases) to plunge.  And we should expect daily deaths to continue to follow the trend of decline.  

Now, let's talk about the nice recovery in stocks today. 

There are plenty of algorithmic trading firms that have machines trading on headlines.  They seem to locked and loaded for "cases spiking."  But after the dust settles, in a zero interest rate world, when excess money is sloshing around, money will continue to move into stocks, and dips are buying opportunities. From those that watch technicals, the S&P 500 held perfectly into the 200-day moving average. 
 

In the hours that followed, this official took a lot of heat, and by the next day, she was trying to walk it back.  But the retraction, wasn't much of a retraction. If we listen to her, it's fair to say that she didn't make a mistake, but the WHO doesn't want that message out as policy.   

You can see that in the video below (just click the image or click here). It picks up at 1:35 and runs through the 5 minute mark. 
 

Finally, with this perspective and with the rising cases, keep in mind that young people are representing a large proportion of positive tests.  And many young people are asymptomatic.  And employers (such as restaurants) are requiring employees to get tested, in order to return to work.  As schools reopen, the numbers will continue to rise, and so will the positivity rate.

As for the economy, regardless of the trajectory of cases, Trump and Mnuchin have made it clear that there will not be another economic shutdown.