With global equities recovering the lion share of the coronavirus pandemic plunge, investors do not have to look far for reasons to follow the old adage of ‘sell in May and go away’. Before this two-day slump, the S&P 500 futures rallied over 36% since the March 23rd low, and also recovered over 65% of the COVID-19 selloff. Fiscal and monetary stimulus can’t end lockdowns or save every lost job. US stocks could see a decent pullback here, but a retest of the March 23rd low seems unlikely.
The bulk of earnings season is behind us and investors did not get what they from the tech-giants. Apple’s Cook was optimistic in the recovery in the US, but failed to give Q3 guidance despite already being done with the first month. Amazon signaled they are spending all of their second quarter profits on its coronavirus response. Amazon CEO Bezos warned shareholders they may want to take a seat. Credit card companies also relayed a consistent message that they see a slowdown with consumer spending. With stocks recovering so much since mid-March, it is hard to be overly bullish in the short-term as everyone’s outlook is cloudy. The next earnings season will be bad and if the upcoming clinical trials on the virus front don’t deliver strong results, optimism will quickly fade for the end of year rally.
A good part of the rally in global equities stemmed from optimism that the timeline for finding a treatment and vaccine for COVID-19 has improved drastically. Treatments will help fight the coronavirus, but for economic activity to return to pre-virus levels, a vaccine is needed.
A month ago, hopes for a vaccine were at least a year or two away, but now it could be happening as soon as September for Oxford scientists or January with US scientist. A lot must go right for a vaccine to get done by January. First, it must be safe and effective. Second, since it will be manufactured before final approval, pharmaceutical companies will need to secure all the supplies to mass produce it. A lot of supplies could go to waste if these bets on vaccines don’t pan out. Third, depending on where it is manufactured, the US might not get the first bulk of the vaccines.
The stimulus trade will likely provide a safety net for a complete collapse with global equities, but as countries begin reopening, the initial reduction with support will put a dent in risk appetite. Stimulus efforts in the US will likely intensify over the next couple, so any market selloff will likely see buyers emerge.
Some investors are attributing market weakness to President Trump’s threat that some tariffs could be levied on China for their handling of the coronavirus outbreak. It is more likely that investors used it as an excuse to lock in profits. The main driver for weakness in stocks today is the profit-taking with mega-caps Apple and Amazon.
With the Presidential election only six months away, President Trump is unlikely to follow through on any of the upcoming tariff threats.
The ISM survey at first glance looked encouraging, but the details and comments on the outlook suggest further economic pain will hit the manufacturing sector. The headline ISM manufacturing reading came in better than expected at 41.5, but still an 11-year low. New orders had the worst decline since 1951. All the dismal data this week points a sharp recession that will sadly lead to more job losses over the coming months.
The bottom is in place for crude prices. Oil prices are firming up as production cut efforts intensify alongside slow signs that parts of the economy are opening up in Europe and the US. Energy markets needed to see big-oil signal deeper production cut efforts that would help balance the market. With not enough capacity to store crude oil, ConocoPhillips, Chevron and Exxon all signaled deeper production cuts this week. Chevron cut capex by 30% and Exxon posted its first loss since 1988 and cut Permian rigs by 75% for the rest of the year.
The energy space will still see lower oil prices persist for the remainder of the year, but the violent swings of last month should be over. Contract rolls could provide some added pressure to the June WTI crude contract, but is should be nothing like we saw last time.
Gold has resumed its role as a traditional safe-haven. Gold prices are rallying as economic uncertainty now must deal with a potential return of tariff threats from President Trump. The global economic recovery needs a lot to go its way for the upcoming recession to be a short one. Gold’s bullish outlook was mainly comprised of the growing stimulus efforts from the central banks worldwide, but now it seems it could also be supported by tariff wars between the world’s two largest economies.
Throughout past market crashes, gold typically loses its safe-haven appeal during the panic-selling phase but resumes it once the recovery starts to take form. The US economy is too vulnerable right now, so President Trump will likely not follow through on these latest tariff threats. Regardless, the risks to the outlook seem countless and that should benefit gold in the short-and-medium term.