Kenneth Rapoza, Senior Contributor
July 2, 2020
Oh, you just hate it don’t you? The market is up, and the coronavirus can’t stop it. Investors must be crazy?
This week, we learned of a return of lockdown policies in New Jersey with indoor restaurant dining shuttered; California governor Gavin Newsom announced the same thing today — no indoor restaurants. Texas has closed bars. Florida has closed some beaches. It’s the Fourth of July weekend. The party is in the backyard. Who’s bringing the fireworks (where legal, of course)?
Here’s why investors are buying expensive stocks even as the coronavirus rampage continues: hope beats fear. Everytime.
“Despite this setback in what has been an incredibly challenging year, we are hopeful that the overall U.S. economy has turned a corner,” says Tony Bedikian, head of global markets for Citizens Bank CFG. “We are hopeful that today’s solid job gains will be sustained,” said Tony Bedikian, Head of Global Markets at Citizens Bank.
Stocks rose Thursday morning after a better-than-estimated U.S. jobs report for June. The Dow Jones Industrial Average rose 406 points, or 1.58%, to 26,141, the S&P 500 gained 1.35% and the Nasdaq NDAQ was up 1.28% in the opening hour. Riskier emerging markets assets, as measured by the iShares MSCI Emerging Markets ETF, was up 2.6%. MSCI China was up 3.26%. Haters gonna hate.
U.S. employers added 4.8 million workers to payrolls last month, according to the Bureau of Labor Statistics, and the unemployment rate dropped to 11.1%. Everyone was blown away by this, and it trump’s the spike in coronavirus cases.
The good news is that the mortality rate of new cases over the last several weeks is less than 1%. Overall mortality rates from the beginning of the crisis in March is still around 4%, most of it due to early errors in states regarding nursing homes. It is highly unlikely that ever gets repeated, thus lowering the mortality rate in time.
Improved company earnings in the quarters ahead, a breakthrough in Covid-19 therapeutics, and maybe a vaccine by winter 2021 could buoy stock prices in the second half of the year, despite campaign season volatility.
Wall Street is fine with Biden or Trump at this point. The real catalyst for the market will be the Fed support and more government stimulus, expected later this month.
Lawmakers have until July 31 to come to an agreement on the extra $600 a week unemployed benefit people were getting in addition to state unemployment benefits under the $2.2 trillion CARES Act. This is an example of government overreach: once you give it, it is hard to take it away. Losing $2,400 a month is a lot of money to lose.
On Wednesday, President Trump told FOX Business Network that he wanted one last round of direct payments to Americans who received around $1,500 each in the second quarter in a first-ever Main Street bailout.
And here is another reason why Wall Street is rising along with the infection curve: central bank money printing.
“Governments across the globe are willing to provide considerable, often historic, levels of stimulus to support economic recovery and central banks around the world have said that they do not believe that they are yet out of ammo,” says Nigel Green, CEO of global financial advisor The deVere Group, with offices in London and Singapore. “There are challenges as well as major opportunities ahead for the second half of 2020. Investors should remain invested,” he says.
Equity markets will be under pressure given the ongoing number of coronavirus cases in the American south, but economic data should start to show some signs of an improvement not only in the U.S. but also in Europe, where their stimulus bazooka is locked and loaded. China is slowly on the mend, as well.
China’s official manufacturing PMI rose to 50.9 in June from 50.6 in May. Consensus was 50.5. Non-manufacturing PMI rose to 54.4 in June from 53.6 in May, also beating consensus today.
“Expectations are generally for a U-shaped recovery, though it is likely more accurate to say that some sectors are V-shaped and others will be L shaped,” says Sebastien Galy, a macro strategist for Nordea Asset Management.
Where Covid-19 spikes, the U might turn into a W.
But once we fade this latest Covid-19 spike in the U.S., and we will, then investors will be all about risk-taking, and not just in the U.S. markets, but worldwide, as U.S. stocks look expensive, especially tech.
Speculators have reduced their e-mini future short positions by the most since 2007. UBS recommended this week to stay long global equities and corporate credit.
“Take advantage of what should be the last post-Covid-19 relief rally,” says Galy. “The environment is set to become far more complex post-rally. Within growth stocks, we would suggest that Wirecard is an important warning that balance sheet analysis is of paramount importance as the tide lifts all boats.”
Wirecard is a German payments firm that got caught up in an accounting scandal.
Further away, China took a series of measures over the weekend to prop up its pandemic-ridden economy. One is a proposition from the central bank to transfer 1.5 trillion renminbi in profits to parts of the economy that needs it as a coronavirus subsidy.
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