Morning all.
First thing to note is that most markets are closed today for Good Friday.
Feels strange to get this extended weekend but be under strict conditions to stay home as much as possible. Some reading in the garden will be my go-to action for the day if the sun keep shining.
I wanted to have a little ramble about the markets and take a look at the SP500 while I wait for it to warm-up outside.
Markets surprised me with the strength this week. When the rebound rolled over after hitting the 38.2 fib retracement I thought we were doing to go back down and at least get close to the March low but instead the, on Thursday 2nd April we got that amazing 6.6mil jobless claims number and it miraculously signalled the bottom!
It was literally history in the making and just a sign of more pain to come but regardless of that, stimulus measures and propaganda from President Trump about how soon the US would be opening up were enough to create this next leg up, which still managed to keep going despite another record breaking jobless claims number yesterday.
The outlook for the global economy is not great right now, with all manner of forecasts reflecting that we should not be expecting a v-shape recovery (in economic activity) and here are a few to demonstrate this:
- Coronavirus could push half a billion more people into poverty globally, UN warns
- JPMorgan now sees economy contracting by 40% in second quarter, and unemployment reaching 20%
- IMF Head Predicts Coronavirus Will Trigger ‘Worst Economic Fallout Since the Great Depression’
So in the midst of this virus outbreak which is still spreading and causing countries to extend their lock down measures and headlines such as the above, the stock markets have just managed to have one of their best weeks ever!
And the result of this rally, as can be seen on the attached chart, is that price has recovered to the 50% fib level of the recent correction.
This is interesting in many regards, because we are arrive at this technical level with a lot of good news priced into the markets.
Where I think there is a big mismatch is that markets seems to have embraced that the US could be open for business again sooner than expected. Trump is constantly pushing this message but I question what ‘open for business’ will actually look like for the US and the rest of the world.
I don’t think economies can resume in this on/off switch manner though and why markets cannot continue this v-shape recovery for long.
Even in the limited circle of my own life I’ve seen my Nephew lose his job and his girlfriend cut to 80% of base contract pay, one of my best friend’s business is only operating at about 30% or normal levels and several shop-owner friends are doing no business at the moment because they are not in the essential category. I’ve also lost some contract work I normally do and I know of many stories through friends and family of people in real trouble at the moment and have to rely on credit cards and favours.
It’s really ugly to consider this is happening all around the world. President Trump loves to talk about ‘pent-up demand’ but I think for so many people, the first thing many will be doing is spending months paying off debts and/or rebuilding emergency savings.
They will not be rushing out to buy cars, go on holiday, treat themselves etc and I also think everyone is going to be very cautious of crowded social environments which means the entertainment/leisure sectors are going to see quite slow recovery that would be immediate destroyed if we get the feared ‘second wave’ of virus spread which is real possibility and something else markets are not looking at.
I’m sure I don’t need to go on with this train of though and that many of you are also thinking this way and seeing similar events in your lives.
I think this means economic recovery is going to be more like a U or a very flat W and that markets need to come into alignment with this when the data starts to confirm a lack of momentum in the pick-up.
I don’t see this as bad thing though and believe it’s healthy if the market and the economy are more synced. If we can raise spare capital it also means we have more time to buy in at fairer valuations which is a benefit.
I don’t know if markets can keep recovering or not but as the US enters earnings season I question whether further optimism can be found now that the biggest stimulus announcements should already be part of market pricing and forward guidance could easily be weak or over-optimistic depending on how cautious companies decide to be.
I’ve hedged more of the portfolio as I’ve taken some profits this week and intend to keep this kind of balance in the expectation that weakness will return to equities before we get through this.
I’ll leave it there for now, I’ll post again to talk about the U/flat-W recovery profile as it has important investing implications.
Stay safe, thanks for your time.
$SPX500 $NSDQ100 $DJ30 $GER30
