The mysterious wiles of Wall Street return tomorrow morning. Up? Down? If I had to guess based on the headlines prior to the Independence Day that wasn’t, I’d say up.
Ignore the noise about the raging pandemic in the southern states. Pay attention to the signal.
Hydroxychloroquine and other therapeutics are doing better than expected, even though none have been approved by the U.S. Food and Drug Administration. A vaccine is coming at some point next year, according to Health and Human Services director Alex Azar. Azar said last week that the “window was closing” to ever get the coronavirus under control in the U.S.
There is a modicum of good news, however, about the latest spread. Coronavirus mortality rates of new infections in Florida, for example, are under a half percent. People are doing their part to smash the curve and protect one another, though maybe not as perfectly as they have done in Asia.
For sure, the coronavirus is among us and we are coping better with it now than we did in March and April, when New York was retrofitting the Javits Center and setting up M.A.S.H. units in Central Park in full-blown “just in case” emergency measures to handle a surge in sick patients. Navy hospital ships were brought in. Over 3 million people were laid off on a weekly basis.
Today, jobs are returning and more stimulus is coming. A V-shaped recovery is plausible, says Barclays. Others say the same.
“In March, it was pretty clear the U.S. would take some kind of action to rescue the markets. We wondered how or how much, says Daniel Coelho Barbosa, an analyst for Vandermart, an options trading shop out of Germany. They bought mini S&P options, using a bear put spread strategy in case they were wrong about the direction, buying a call option on the other side. It worked. They won. “It turned out to be two trillions of dollars of stimulus. Those numbers are so big that ordinary people just can’t figure out what that all means. But one thing was for sure: it will cause lots volatility and we wanted to ride that wave.”
The rebound is unlikely to alter policy support, reaffirmed in last week’s Fed minutes and declarations from France and Germany in regards to a common European fiscal policy to combat the economic fallout caused by the pandemic.
“My vote for the most significant driver of stock prices is the huge amount of liquidity that the Federal Reserve has injected into the financial system, in an effort to counteract the depressive economic impact of the virus,” wrote Steve Rattner in an op-ed in The New York Times
Globally, incoming economic data has been better than expected, with this week’s set of June manufacturing PMIs surprising to the upside in China, in particular.
The Caixin China Services PMI for June came in at 58.4 on Friday, the fastest month-over-month rate of expansion in 10 years.
China haters gonna hate.
Also, those highly politicized by the Trump Administration hoping for a second wave to wipe him out for good may find that the electorate has reached the lows for Trump, and the highs for Biden anyway. This is Biden’s race to lose now.
There’s a lot of volatility to play out yet between now and election day in the U.S., but it seems pretty clear that Wall Street is as fine with a Biden presidency as it is with a Trump presidency, so long as the recovery story remains in play.
Last week’s job numbers prove what many investors have been saying since the layoffs began in March — that the unemployment data would be a “false positive” as people were laid off because of government actions. Once lockdowns eased, many would start returning to work; that is happening, especially in the northeast.
All of this led Barclays to say in a note on Friday that the economic trends of the last week solidifies the narrative of a V-shape recovery.
The still-missing service sector PMIs over the coming days will indicate whether service businesses can stage the same rebound as manufacturing.
The news has been good there as well, led again by the northeast. U.S. labor market data for June was better than expected, with the majority of the employment gains coming in services.
The link between re-opening of the economy and rehiring is happening worldwide.
Germany saw a much faster-than-expected deceleration in jobless claims in June. Together with the temporary VAT cuts starting in July, this should support confidence and a recovery in Germany’s consumer demand.
The risk is all in the pandemic.
A better job market could have the rug pulled out from under it if developments related to infection curves continues in the wrong direction.
New infection rate increases have been localized and contained in Europe (concentrated around a meat factory in a smaller German town), the UK (in the city of Leicester) and China (outskirts of Beijing near a food market, where the outbreak now seems to be under control).
Pandemic: Ignore At Own Risk
So as not to get too bullish, Covid-19 infection cases are still rising outside of the U.S., where many investors are finding cheaper securities to buy than they are finding here.
“Markets driven by euphoria never end well,” says Fernando Pertini, a well-known financial advisor in Argentina. “Second quarter results coming in about two weeks and are going to be the ugliest thing ever. You still have over 20 million unemployed, and then you have elections and new waves of Covid-19. U.S. debt and its deficit are completely out of control,” he says, listing more reasons to cash in from U.S. stocks for now. “I might be wrong, but I am pretty convinced is time to sell this market.”
As far as the coronavirus strain on the market goes, as long as news about hospitals having things under control, and the mortality rate remaining below the levels in the initial outbreak, markets should be less inclined to panic.
Consensus is that there now has to be some trade-off between pandemic mitigation and the easing of economic pain. That dance between the two will be inevitable this time around. No matter how deadly and fast spreading the coronavirus is, at least 95% of those who get sick with Covid-19 recover. For now, the problem is 5% of tens of millions of cases is a lot of deaths. The mortality rate has to decline for markets to worry less about the pandemic going forward.
Data on the coronavirus varies by state, and even at the county level.
Not all of Texas is bad, but parts of it are. ICU units could become strained there quite easily. Death rates could rise. Mortality rates rising to around 4% like in the epicenter outbreak from March onward would be a massive headwind and sap serious energy from the market, exhausting public confidence in a recovery.
To date, Wall Street has also not panicked too much over a return of partial lockdowns. New Jersey has banned indoor restaurants. Broadway is closed for the season. It’s a lost summer for Manhattan.
Over in the EU, countries have relaxed bans on non-essential travel last week, with its citizens heading for their Mediterranean summer vacations, and with the UK re-opening its pubs this weekend.
Prepare for more coronavirus cases in Europe? Probably.
But pay attention to hospitalization surges and mortality rates. This is the data point that matters to markets. If thousands are catching it, but hospitals are fine, and the death toll is better than it was in the first wave, we may just have to admit that you can run but you cannot hide from the coronavirus.
For Christian Keller of Barclays in London, “The risk that resurging infection rates will turn an initial V-shaped success into a double-dip W later this year remains a threat.”
Here’s the vaccine to that:
The Treasury Department’s hidden reservoir of dry powder to fight the economic downturn. Much more liquidity will be deployed in the third quarter.
“There is around $1.2 trillion stuck in the middle of the process of all of these cash swaps,” says Brian McCarthy, head of Macrolens. “The injection of those funds into the system is still ahead of us. Mnuchin has a trillion dollars worth of fire power ready to go, with another $130 billion left unused in the Payroll Protection Program,” he says of one of the stimulus programs going to small business owners. “This should bolster our confidence in the V-shaped recovery. Don’t mess with Mnuchin,” he says.
Diversification is key. Once Wall Street has moved on from the pandemic, and we are not there yet, it will be a more complicated market. Everything won’t go up and down at once. Tech might not be a leader.
“Investment portfolios must be adequately diversified across asset classes, sectors, regions and currencies,” says Nigel Green, head of international financial advisor deVere Group. “This is the investor’s best weapon to capitalize on the opportunities and sidestep risks.”