There is a loud chorus calling for a re-test of the recent lows around 2,200 based on the empirical fact that almost every major market sell-off of more than 20% has a retest of the lows, but that looks a bit complacent and as the old saying goes, in markets “the obvious rarely happens, and the unexpected constantly occurs.” – Market Update, 24 March 2020
Since the market lows of March world governments and central banks pulled together and successfully avoided having a health and economic crisis also become a financial crisis by pumping nearly $10 trillion in liquidity. Much to the disbelief of most market participants, equities have staged a steady recovery with the S&P 500 returning nearly 13% in April followed by a 4.5% return in May. The reality is that while most were too busy gawking at how much worse things could get, the massive injection of liquidity into markets was busy utterly overwhelming economic and financial fundamentals, with the Fed clearly leading the way.
Between the Fed’s intervention and extremely loose fiscal policy enacted via more generous unemployment protection and stimulus checks deposited direction into Americans’ bank accounts, financial conditions promptly recovered. Surely enough, the combination of underemployment, lockdowns, spare cash and the Internet 2.0, beckoned Millennials to download the Robinhood apps and participate in financial markets. Indeed, the S&P 500’s nearly 20% run up from the March lows has been mostly enjoyed by retail investors, with institutions largely staying on the sidelines, in what has become the latest humbling of the market consensus. Notably, the lion’s share of the returns accrued to tech names as well as other brands with which Millennials are most familiar.
During his testimony, Hotez, who himself developed a SARS vaccine that never reached human testing, went out of his way to ding companies for raising expectations. “Unfortunately, some of my colleagues in the biotech industry are making inflated claims,” he told the legislators. “There are a lot of press releases from the biotechs, and some of them I am not very happy about.” – MIT Tech Review
As the WHO declares a global health emergency and countries around the world move to quarantine China, risk assets sold off with the S&P 500 returned -2.12% for the week. […] As long as the epidemic doesn’t deteriorate going into the second half of February forcing factory closures in China and impeding international trade, the global economic and markets outlook remains bullish, especially from 2H2020 onward. – Market Update – 2 February 2020
Market participants were largely caught off-guard by the string of national quarantines forced by the rapid spread of Covid-19 around the world causing markets to face the first liquidity crunch and US dollar shortage since 2008. In the fastest 20%+ drop in the S&P 500, we can expect markets to outrun the newsflow, and the newsflow to outrun the economic data as Covid-19 will dominate the three at least through Q2.
The questions on everyone’s minds right now include some variation of when everything will return to normal and/or whether the S&P 500 has bottomed yet, but the unpalatable reality is that Covid-19 has rendered most forecasts and economic data relatively useless beyond pointing to the obvious. As expected PMIs have plummeted and GDP growth projections for Q1 and Q2 look as dire as they ever have, but anyone claiming to know what a PMI in the 30s and GDP growth of -20% looks like, and what happens from here is being naïve at best and disingenuous at worst. Current conditions bear close watching as clues on what’s next will unfold quickly.
The logical starting point for any analysis begins with Covid-19 and from a naïve perspective, Europe and the United States seem to be roughly 2 months behind China, which is now in the process of lifting Hubei travel restrictions, with Hubei coming back online in early April. From a crude perspective, that, along with the fact that the average latency period of Covid-19 is around 14 days, suggests that by the end of April we should start seeing more re-openings in the US and Europe than closings, but it bears repeating that the situation is fluid and many relevant factors can change over the next 5 weeks.
As the WHO declares a global health emergency and countries around the world move to quarantine China, risk assets sold off with the S&P 500 returned -2.12% for the week (-0.16% for January after being up more than 3%). The US 10-year Yield dropped to 1.51% as the yield curve inverted once again. Commodities tied to the strength of the economy also declined while the US dollar rose. As long as the epidemic doesn’t deteriorate going into the second half of February forcing factory closures in China and impeding international trade, the global economic and markets outlook remains bullish, especially from 2H2020 onward.
Economy
There is a fair chance that US Inflation will become a concern this year given that the US Economy is operating above potential, wage growth has been strong with labor markets tightening and the Fed is likely to maintain easy monetary policy if not cut rates further
US Employment continues to be strong as the simple unemployment based SAHM Recession Indicator is at a low 0.03 (a reading of 0.5 or above implies a Recession is expected)
US Consumption continues to be strong as well:
Real Earning Power is at 15-year highs
Consumption Growth has been between 2-3% year-over-year since 2016
Personal Savings Rate is at multi-year highs
Financial Obligations as a percentage of Disposable Income remains very low
The US is also currently undergoing a strong Housing boom, though the possibility of a choke collar (i.e. prices rising so much that low interest rates become less important in making homes affordable) putting a halt to it is become more likely
All in all, while there is a Manufacturing Recession in the US, there is clearly scarce evidence of it spreading to other sectors of the economy. This makes sense given that Manufacturing is only roughly 10% of the Economy while consumption is around 70%
