Running Hot

This week, markets continued their unprecedented run from the March 23rd low. Since that day, the S&P 500 has climbed roughly 29%. This has been the fastest and strongest bear market rally of all time. The impressive action stands at odds with the increasingly dismal economic data hitting from all sides. Rather, the market has turned its focus to the impact of $4 trillion in fiscal and monetary stimulus set to hit the market in the coming months and the growing discussion about when and how the economy will be reopened. In addition, positive trial results from Gilead have raised hopes for a solution to the virus. While we respect the rally, we also want to acknowledge that there is still an exceptionally high degree of uncertainty out there and as we move into some key resistance levels, we should expect some profit-taking.  

It may be early yet, but it finally seems like we are turning the corner on COVID-19. New cases in the US have been trending lower for the last several days and appear to be following the trends we've seen in Europe where portions of the economy are getting closer to re-opening. This has begun to shift the conversation in the US from the spread of the virus towards how to re-open. This changing dynamic has supported the market's move higher off of its lows. Still, we've got a lot to work through.  

Roughly 22 million Americans have now lost their jobs and GDP could be hit anywhere from 10-30% in the second quarter. We hope that a lot of this will be temporary, but we know that some of these jobs and demand may be permanently lost or will take a long time to come back. The $4 trillion in stimulus should go a long way in plugging the hole, but there will undoubtedly be some long-term damage from carnage of this magnitude and the policy response we've seen. After such an impressive run, it seems unlikely that the market can continue without at least taking a few steps back. The S&P is extremely overbought and history indicates that consolidation is likely over the coming 1 to 3 months.  

We also got our first glimpse of company earnings reports this week with the focus largely on the big banks. To no one's surprise, the banks loaded up their loan loss reserves and their earnings suffered as a result. This is in anticipation of widespread charge-offs from both consumers and businesses.  They are bracing for the worst and the markets treated them as such. At the same time, the banks managed to project calm confidence that they are in a position to weather the storm and that did not go unnoticed either. As reports roll in from industrials, retailers, and other sectors over the coming weeks, we'll be able to piece together a better picture of the damage that's been inflicted. We continue to believe that patience is important.  

Preston May, CBE®
Research Analyst