Despite a strong rebound in oil prices, last week was perhaps a reality check for global markets as the depth of the downturn in both economic growth and corporate earnings became ever more evident. U.S. Q1 GDP, consumer confidence and manufacturing conditions were all worse than the already horrible numbers expected by the market. And while the Fed re-regurgitated its own version of the “whatever it takes” central bank mantra, stocks saw fit to finally react to the incredible 30 million build up in U.S. jobless claims over recent weeks.
It did not help that U.S. President Trump, thrashing around for someone to blame, seemed prepared to relaunch a trade war with China. And while Q1 tech earning were reasonable (as was expected), Amazon and Apple were guarded about the Q2 outlook and even Elon Musk admitted Tesla’s share price was too high. Warren Buffett, meanwhile, admitted he had ditched his airline stocks last quarter and had yet to see real value emerge in the market.
Talk of ‘re-opening’ America is also being tempered by the reality that national daily new CV-19 cases – while flattening – are still bubbling along at an uncomfortably high pace.
As it stands, the S&P 500 shed 0.2% over the week, after a messy 2.8% decline on Friday. This marks the third reasonable pull back in the furious rally since late March and, as the technicians were quick to point out, came at the 61.8% Fibonacci resistance level (Google it!). Of course, the market has pushed through earlier lower resistance levels, so it yet might break this one also – in which case the next stop would be a re-test (as incredible as that sounds) of the February peak. In terms of other technicals, the market is holding above both its 20 and 50-day moving average, and the last pullback low of 2,736 on April 21. And possibly not helping the market last week was the start of the new month, which might see more fund managers re-balancing back out of equities after the strong April rally. So while I’m still bearish, I’d concede the current U.S. market rebound might not be over.
In terms of the week ahead, the U.S. April employment report looms large. The report is expected to reveal a staggering loss of 22 million jobs, and a surge in the unemployment rate to 16%. We’re also half-way through the Q1 earnings reporting season, with major media companies such as Disney, Fox and Newscorp outlining their results this week.
S&P 500 CY’20 earnings are now expected to decline by 18% after which they’re expected to rebound by 25% in CY’21. Both these numbers still need to be pulled down substantially – while the S&P 500 is now on a price to (current) forward earnings ratio of 20!
Last week the S&P/ASX 200 tried and failed to push to new highs in the current market rebound, and is likely to start the week on the back foot also. In terms of data, the modestly higher than expected Q1 consumer price index (CPI) was justifiably ignored by the market, though Friday’s slump in the AIG manufacturing index (to 35.8) added to market unease.
This week the focus will be the RBA meeting on Tuesday and updated RBA economic forecasts in Friday’s Statement on Monetary Policy. As already widely reported, the RBA will likely confirm it expects the unemployment rate to hit 10% by June. Of perhaps more interest now, however, will be how rapid an economic recovery it expects – for example, what will be its June 2021 unemployment forecast?
While there’s also talk of local ‘re-opening’, the reality is that this is likely to be very gradual, with the major states of New South Wales and Victoria seemingly lagging the rest. The fact we’re approaching winter means we need to be especially cautious compared to our friends in the Northern Hemisphere.
Have a great week!