Despite continued shocking US economic data and corporate earnings results, hopes with regard to US curve flattening and potential re-opening of the US economy continued to drive a positive view on risk markets last week. Other positives were a leaked media report suggesting Gilead’s remdesivir drug can reduce the risk of death from CV-19, as well as a lingering view that the Fed simply won’t let Wall Street drop again in a big way – and could even buy equities if need be.
Also helping the US market in particular is the fact that the leading tech-style stocks – such as Amazon – have been least negatively affected by the shutdowns so far, and there’s now a major crowding into these perceived safer stocks taking place.
To my mind, the markets are getting a little giddy. Despite US President Trump’s cajoling, many State Governors remain reticent to ease social distancing restrictions quickly – especially given the lack of testing infrastructure yet to be put in place to quickly contain any further outbreak. As regards the “wonder drug” remdesivir, moreover, some have pointed out the lack of a controlled study – as given many of the patients used in that trial had less severe symptoms, most would have been expected to recover nicely in any case! US tech will also be negatively affected to the extent the recession drags on and both consumer spending and advertising budgets are cut.
Lastly, I’m also a little troubled by the market’s now cult-like belief in the Fed – to the extent that the Fed may buy equities to support the market should there be a renewed decline. Even if the Fed did intervene – I still think it is a Rubicon it won’t cross – I doubt it would have much sustained impact if stocks start falling due to a renewed bout of pessimism with regard to the economy and earnings.
Meanwhile, the US market is now trading at a price-to-forward earnings ratio of 18.5 – or almost near its 19.3 high at the market peak in mid-February. As I pointed out in a blog last week, we’re still facing at least a 20% decline in US forward earnings over coming months, which would have the market trading at 24 times earnings even at current levels! That’s a level not seen since the dotcom bubble two decades ago.
That said, until such time as the US economy tentatively re-opens and the actual shape of the recovery starts to take shape, markets may continue to live in blissful (ignorant?) hopes of a V-shaped recovery.
In terms of data, we learnt US retail sales crashed in March – suggesting consumers were becoming cautious even before the majority of locks downs took effect. Another 5-odd million Americans made claims for jobless benefits – down from over 6 million in each of the past two weeks – which at least suggest this number may have “peaked”, albeit at levels that still suggest the unemployment rate could hit 15 to 20% in the next month or so. Chinese economic data was mixed, with an expected contraction in Q1 GDP but signs of a more recent bottoming in industrial production.
We should expect more horrible US economic data this week, with massive slumps in manufacturing and service sector indices for April – which will likely again be dismissed by the V-shape crowd. The US Q1 earnings season also rolls on, which will likely see further downgrades to the corporate earnings outlook but could also be dismissed by the V-shapers.
Last week’s data highlight was surprising residual strength in the March employment report, with a small gain in jobs and a drop in the unemployment rate to 5.2%. Otherwise, clearer signs that we’re getting on top of the CV-19 problem – along with global equity strength – supported our market and the Australian dollar. That said, given our politicians appear even more reticent to re-open the economy quickly than some in the US – and our smaller technology sector – our market has lagged the global equity recovery so far, and I’d still be fairly cautious about the outlook. The heavy-weight financial sector especially continues to struggle, though resources and smaller caps have enjoyed the rebound in recent weeks.
We’ll be spared more shockingly weak economic data this week, while minutes from the latest RBA meeting are released on Tuesday. All up, out market will continue to be guided by Wall Street.
Have a Great Week!
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