I’ve argued since March 25 that investors should be more focused on the resuscitative effects of policy rather than the underlying economic data itself. That’s meant: no Depression, higher stock prices, and increased odds of an inflationary future.
With weekly jobless claims still cracking 2 million as we stretch into June, that calculus is getting more difficult. The stock market is reflecting this, with a tug of war playing out the past month that’s slowed the momentum of the rally.
Small investors are bullish, Wall Street is bearish. The forward P/E of the S&P 500 is the highest since the dot-com bubble, but current earnings expectations won’t mean squat if there’s a medical breakthrough. Powell doesn’t want to go negative, and Washington isn’t eager for another fiscal package. The index is effectively unchanged since May began, and this week’s strength, while impressive, only peeked above the 200-something point range that has defined the index since mid-April.
The spring is coiling. The 2,800-2,900 level will prove to be more pit-stop than permanent residence, and when we exit, it’s going to be in a hurry. The longer we stay range-bound, the tighter this spring coils. Think Netflix
As insane as it may seem, with stocks more expensive in this crisis than at any point during the late bull market, it looks like bulls still have an edge. Squint on the chart of the S&P 500 and within the recent range you will see mostly higher lows. Combine that with last Thursday’s powerful dip-buying, and the bullish argument is the easier one to make within the context of this generally sideways pattern. With the Treasury rally at an apparent impasse without negative interest rates, the odds continue to favor American tech stocks as the only game in town.
That’s the current status, at least. Under the surface there is some inter-sector volatility. Since last Thursday’s banks-led turnaround in the S&P 500, there is a budding rotation trade into financial, industrial and consumer stocks that seem closely tied to the early success of reopening. While exiting quarantine may not be ideal for stay-at-home trades like Zoom Video or Peloton, it certainly ins’t bad for tech stocks as a whole, which include semiconductors and credit card companies. That means equities are in a bit of a win-win situation. There’s a big section of the market tied to quarantine, and there’s a big section of the market tied to reopening.
Even if the Nasdaq’s outperformance ends, it’s only a real threat if it’s due to a change in sentiment. If it’s because the cyclical reopening trade is taking shape, flows out of the Treasury market should help support stocks as an asset class.
The market is frothy based on earnings expectations, but none of that will matter if there’s a medical breakthrough. Even if there is no vaccine, so many companies have withdrawn guidance that the potential for big earnings beats next quarter also looks high in the event of just a steady return to normal.
The stakes are high, and the fundamentals are on the brink. Investors are still shrugging off horrible employment data, but that will change in a hurry if it starts to look like the current fiscal support programs will not be enough. A fumble by policymakers would be a gift to bears, who at this point are holding on for dear life.