@theMarket: COVID Case Concerns Cramp Market Gains
The disparity between rising nationwide virus cases and a rising stock market finally took its toll on investors this week. While damage was sustained to the averages, it was far from a bloodbath. A few more days of the same back and fill would not be a surprise.
Stocks lost ground under the sheer weight of skyrocketing infections throughout those states that have heeded Donald Trump's directions to ignore medical advice and re-open their economies. Valuing election victory over lives has cost us all a great deal and it is not over. I expect that without a national policy, or strategy to guide us, today's regional "hot spots" will migrate. Carriers from one state, city, or town will spread the virus to others in a succession of infections that will prolong the pandemic and deaths.
As a result, we should also expect to see the economic data in the weeks ahead begin to reflect the case counts we are reading today. If so, you might be anticipating that the stock market will sell off, maybe even re-test the March lows. If you sold in a panic back when, (as many did) and missed the 53 percent move higher in the S&P 500 Index since then, I suspect that is what you are hoping for. Don't hold your breath.
Here is what you are missing. The stock market is not marching to the tune of the COVID-19 Top Thirty. Sure, on a day-to-day headline basis, markets could move up or down (like they did this week) as the case count worsens, or a new vaccine possibility is announced. But the stock market gains amassed thus far have been the work of monetary and fiscal stimulus.
The worse the infective fires get — the cases, the deaths, the weakening data — the more stimulus the government will pour on the flames. A new stimulus package, which may now be expected to total $1 trillion, could easily double, or triple, if things get out of hand. If stocks drop too fast, or too far, I fully expect the Federal Reserve Bank and the U.S. Treasury to step in and support the stock markets, as they are doing now in the bond markets.
Armageddon can only occur if no one does anything. In an election year that won't happen, in my opinion. Speaking of elections, Joe Biden launched his own version of Donald Trump's America First program. Biden's U.S.-centered plan would see government spend $700 billion in American-made materials and products over four years. Another $300 billion would go to U.S.-based research and development involving electric cars, artificial intelligence, and other cutting-edge technologies.
While he also promised to raise the corporate tax to 28 percent, Wall Street and big business were expecting that anyway, given that the Trump corporate tax cuts of 2018 did not produce the desired results. Overall, investors seemed to take on board that a Biden victory, while possibly disruptive to further gains in the stock market, would not necessarily spell the end of business, nor usher in an era of socialism/communism as the president would have us believe.
Earnings season begins next week with the money-center banks reporting in mid-week. While results are backward-looking, and therefore already discounted by the markets, investors will be listening for guidance from the CEOs and CFOs as to whether the economy is beginning to roll over again (the bear's case), or that the economy is still gaining momentum. Either way, expect volatility.
As for where I see the markets going, my bet is that we could see the S&P 500 Index tack on another 100 points before the end of July. At that point, let's reassess.
@theMarket: Markets Celebrate Fourth of July
The continuing gain in jobs cheered equity markets on Thursday, just before the holiday weekend. Given the surge in virus cases in more than half of the United States at the same time, some investors were dumbfounded. They just don't get it.
The nation added 4.8 million jobs in June, which was better than expected. It was the second month in a row that the employment data surprised investors by beating expectations. Remember, however, that this data is backward looking. The bounce back in the economy as a result of re-opening businesses resulted in these upside labor surprises. Readers should expect those employment gains to moderate next month for some obvious reasons.
Topping the list is the massive upsurge in virus cases in those states that chose politics over lives. The pandemic has slowed many state plans to re-open their economies and will impact future growth as well as further employment. I suspect this three-day weekend will damage the American comeback even further, unless the nation actually listens to the advice of medical experts.
In the meantime, I've spent most of the week explaining to clients and readers why I have maintained my bullish stance throughout the last several months. It comes down to my view on the future of the economy and the stock market. There are three main schools of thought on how the economy will weather this pandemic.
There are those who believe a "V" shaped recovery is in the offing. These are mostly politicians and investors with their eye on November's elections. Then there are those who think we will see a "U" shaped gradual pickup that will take longer to accomplish. Finally, there is a group who believe we will see a "W" type recovery, where the big decline in March is followed by a sharp recovery (like what we are experiencing now), only to fall back again before finally rising out of the chaos.
If you look at all three cases, what do you see? In every case, the direction of the right side of each of these letters is going up. From my perspective, that is all you need to know. Will the restoration of jobs and the economy require six months, 12 months, or even 18 months? No one really knows, because no one can game the virus without a vaccine. Whether the economy takes a longer or shorter time period to get there, it will still recover, and so will your investments.
There are several promising vaccines in the works worldwide. In some cases, such as one Chinese version (that is already being administered to their army), the chances of success should be known sooner than later. Several drug companies are expected to provide further information on their vaccines in the fall. A successful drug would be a gamechanger, not only here in the U.S. but for the economies worldwide. In which case, the "V" might be the preferred choice.
Thanks to the massive stimulus provided by the government, the last quarter in the stock market was one of the best since 1998. And the stimulus is expected to continue fueling further gains in the financial markets. While I still expect markets to have their ups and downs, hang in there, because better days are coming if we all use our common sense.
@theMarket: The Virus Versus the Fed
Bulls and bears are in a tussle. Market averages reflect the battle that is moving stocks down, up, and then sideways throughout the week. It is a phase where investors are in a data-dependent mood and the data isn't all that good.
The bears are watching the COVID-19 cases climb higher every day, which threatens to trash their expectations for a "V" shaped recovery. The bulls, meanwhile, aren't too worried. They are banking on the Federal Reserve Bank's promises to keep pouring added stimulus support into the financial markets just in case the virus pushes the economy further toward the brink.
It did not have to be this way.
A few months ago, America had a chance to beat this pandemic. That was before the president decided to politicize the virus, pretend it wasn't serious, and then fumble the response when he realized it was. Now, with the number of new virus cases hitting the highest level since the onset of the pandemic in America, he chooses to simply ignore it.
We are left holding the bag. However, readers are also aware that the American people are not blameless. For weeks I have been warning that the general disregard for following medical guidelines among the public was likely to produce the present results. When our politicians encourage this behavior, and even support gun-toting radical groups to storm state houses, this is what you get.
Twenty-seven states (and counting) have witnessed an increase in COVID-19 cases. The worst hit among them followed the president's urgings to re-open, downplay the risks, and get the economy moving again before the election. New York Gov. Andrew Cuomo, who has paid his dues combatting the worst outbreak in any American state, said it best. "You played politics with this virus, and you lost."
So, what happens now? Most likely, we get a few more rounds of positive economic data points, such as stronger retail sales, higher manufacturing numbers, etc., but those are "rebound" numbers from a low, low base. After that, the data will look less rosy and may even decline, if the virus numbers increase and begin to spread outward from hotspots in the West and Southeast.
The economy, as we know by now, is not the stock market. The stratospheric levels of the indexes are all about Fed stimulus. The thinking here is that as long as the helicopter money is still raining down from a central bank sky, buy stocks. Fundamental news, such as the results of yesterday's stress test by the nation's large banks, which at one time would have been important, has little to do with what happens to their stock prices.
Speculation in the markets by new retail investors, stuck at home, and trying to make money day trading, adds another unpredictable element. It is their buying, for example, that is bidding up the stocks of bankrupt companies, like Hertz and GNC, or chasing unproven "story" stocks at a few cents a share to see them double or quadruple in a day, or a week. My advice is buyer beware if you are trying to play that game, because they almost always end badly.
June is almost over, and I expect there will likely be more turbulence early next week. There is some talk of a large end-of-quarter rebalancing among institutions from stocks to bonds, after the strong equity gains this past quarter. That could cause some additional selling, maybe another 100-point risk to the downside in the S&P 500 Index.
However, contrarian indicators, such as bearish investor sentiment, and high short interest on the S&P 500 Index, plus expectations of another massive fiscal stimulus bill next month, would indicate that stocks are still in a bullish phase. Last week's advice, therefore, to "buy the dips" remains in place.
@theMarket: Markets Fear New Virus Surge
Thursday happened to be one of the worst days for the market all year. Stock indexes dropped between 5-6 percent in the blink of the eye as the number of COVID-19 cases spiked higher in several states. Was that simply an excuse to sell, or should we be worried about a second surge?
As far as a second surge is concerned, I don't know what Wall Street is talking about. We are still in the initial phase of the pandemic. All that has happened is that a number of states are playing catch up with ground zero states like New York, New Jersey and California. Of course, it doesn't help that most states, like Florida, Texas, Arizona, Mississippi, Alabama, etc., have all but ignored the medical guidelines for re-opening their economies. This flouting of the best medical advice in favor of political partisanship has contributed to the sudden spike in cases since Memorial Day.
If investors spent a little more time listening to the epidemiologists, instead of bidding up airlines and cruise ship stocks, they would have realized that new cases would start to show up by the second week in June. And, like clockwork, that is just what is happening. But I believe this so-called "second surge" was simply the excuse traders needed to take profits in a market that had become way too frothy.
In my column last week, I wrote:
"Can we go even higher? I expect so. Look for the S&P 500 to hit 3,220-3,250 next week before pausing to catch its breath." The S&P 500 Index touched 3,232 on Monday before profit-taking set in. Thursday, that same index fell to the level I discussed with you two weeks ago, the 200 Day Moving Average at 3,002, and that is where it bounced on Friday.
Is it a coincidence that the new virus numbers coincided with the technical levels that I have been watching? You might think so, but I believe otherwise. As such, we should see some further correction next week after this bounce has played itself out. I am guessing we possibly break back down below the 200 DMA on the S&P 500 Index, depending on the virus news.
My reasoning: the surge in COVID-19 cases will continue into next week and beyond. That won't change. That should cap the market's upside, but not the downside. I believe investors will be jumpy until we determine the extent of the new virus surge.
A countervailing bull trend would be the argument that the medical community is now far better prepared to handle an uptick in virus cases, so further isolation tactics are not necessary, and we can expect fewer deaths. At the same time, both the Trump Administration and businesses are determined to re-open the economy. They are on the record stating that there will be no further economic shut-downs. That should support the stock market, at least temporarily, in my opinion, if things get out of hand (virus-wise) across the nation, than all bets are off.
Of course, both the bulls and the bears are avoiding a very ugly truth hiding underneath of all this financial, medical, and economic story-telling. The fact is that American lives are at stake. We are way beyond the worst-case estimate of 100,000 deaths and over 2 million virus cases and we are still counting. For our elderly community, this pandemic is a death warrant just waiting to happen.
The greatest tragedy of all is that most Americans, through their willful and selfish decision to ignore the rules as a matter of national political and economic policy, have made the decision that "the lives of the elderly don't matter." I can only say shame on us.
@theMarket: The Market's Line in the Sand
Over the last two weeks, as Americans returned to work, the stock market climbed rapidly. It has now reached, and breached, an important historical technical indicator. If it can remain above it, investors will begin to believe that the worst is over.
The S&P 500 Index (as opposed to the Dow Jones Industrial Average) is what most professionals consider the benchmark index. This week, buyers pushed that index above the 3,000 level for the first time since the pandemic caused the markets to crash back in March. Why is that important?
That is the level that coincides with what is called the Two Hundred Day Moving Average (200 DMA). The 200 DMA is where investors historically draw a line in the sand. It is considered a long-term indicator of the health of the stock market. The indicator appears as a line on a chart of stock prices. It moves higher and lower along with the longer-term price movements of the financial instrument it follows; in this case, the S&P 500.
As long as the index is above the 200 DMA, stocks are considered to be in a long-term uptrend. If that sounds a bit like voodoo, so be it, but that little line has proven to provide uncanny support for stocks time and time again. Below the 200 DMA (where we have been for the last few months), technicians and chartists would say that markets are still in a down trend.
Now, remember, this is far more of an art than a science. Sure, this week we have closed above the 3,000 level two days in a row. That is a good sign, but I would feel more confident if we remained above that level for a few more days. Friday should give us a good test case of the market's willingness to remain above the line, thanks to President Trump.
I gave readers a heads-up last week on the concerns I have over the president's ploy to switch the market's (and the nation's) attention from the pandemic to blaming China for almost everything, including his own failures. In a classic Trump tactic, he is pointing his finger at the Chinese for reneging on the trade deal, for starting the pandemic, for changing the rules of the game in Hong Kong and, if we wait long enough, who knows what he will come up with.
That is not to say that the Chinese are blameless, because they are not. My beef is that Trump's timing is off. The problem with China is that its leadership has shown in the past that they neither bluff easy, nor give in to threats, especially where they perceive their national interest is threatened. If Trump wants to go down the road of sanctions, trade duties, etc., so will the Chinese. Ask yourself "do we really need another potential trade embargo, or another disruption in supply chains on top of what our economy and work force are already grappling with?"
Up until now, investors have focused almost entirely on the pandemic, the economy, and its aftermath. The consensus seems to be that, barring another resurgence of the virus, the economy and the markets have weathered the worst and things are looking up. Enter Donald Trump, stage left, and his new beef with China. Depending on the outcome, which will hopefully be revealed sometime later today at his press conference, investors will either run for the hills, or stay put. Readers will know the verdict by simply watching the 200 DMA.