Investors remain susceptible to shifts in news flow
MAY. 18, 2020
Investors remain susceptible to shifts in news flow: Equities had their worst week in nearly two months, as cautious comments by Dr. Fauci and Fed Chair Powell shifted investor views. Monday shows the shifting nature of sentiment, with a rally on the heels of encouraging vaccine data. Investors are reactive to positive and negative news on short and long-term treatments.
Valuations are increasing as earnings deteriorate: The S&P 500 IndexTM has been largely unchanged over the past month despite some wild gyrations as investors are acting confused in the absence of certainty. Since the beginning of April, however, the outlook for 2020 earnings has deteriorated by nearly 20%. As a result, the price-to-earnings ratio for the S&P 500 has risen to the highest level since the technology bubble. Given the depressed nature of 2020 earnings, this is not unexpected, but we are becoming increasingly reliant on 2021 earnings showing a sharp recovery in order to see higher equity prices.
Tug of war between bulls and bears: Markets appear to be in a tug-of-war between bulls and bears, as risk metrics have stabilized. Investor sentiment and equity momentum indicators saw dramatic improvement since April but have since stalled. Bond indicators have become bifurcated as yields have stabilized, with spreads in areas of focus by the Fed continuing to tighten, while riskier areas remain stressed. Investors are looking for tangible signs of recovery before taking the next step higher.
Rhetoric between the U.S. and China is extending well beyond the coronavirus response, with the Commerce Department unveiling a new rule limiting sales of chips to China’s Huawei. There are also discussions of giving American companies tax breaks and subsidies to move operations or key suppliers out of China. China plans to activate the “unreliable entity list,” restricting or investigating U.S. technology companies. The post-outbreak relationship will look very different than pre-crisis, which could have revenue and margin implications for multinational companies.
Economic data continue to reflect the severity of the shutdown, with retail sales falling a record 16.4% and industrial production dropping a record 11.2% in April. There are some high frequency datapoints, though less reliable than monthly and quarterly data, that are showing some “green shoots,” including a steady increase in Apple map requests and a tick up in home-buyer demand by Redfin. Uber says that ride requests are higher for three straight weeks and OpenTable reports increased requests. Largely, equity markets have chosen to look beyond the devastating economic news, as it is seen as temporary. As the economy reopens, it is unclear to what extent optimism is already priced into markets.
The outlook for the political world is as uncertain as the economy. Approval readings and election polls consistently lean towards Joe Biden, with the average national poll showing Biden with a 5% advantage with healthy leads in most battleground states. Betting markets tell a very different story, with the average giving President Trump an 8% lead. The lack of progress on the next phase of coronavirus relief is a clear indication that the brief period of bipartisanship is over. Election uncertainty will likely continue to add volatility to markets as increased attention is placed over the next six months.
What to Watch
This week is relatively light this week, including housing starts on Tuesday and PMI data and leading indicators on Thursday. The minutes from the recent FOMC meeting will be released on Wednesday.
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