Market Strategy 6/01/2020

Key Takeaways

• This first week of June begins with progress on the Covid-19 front with economies reopening stateside and around the world offset by geopolitical challenges stemming from developments in the relationship between China and Hong Kong as well as protests in the US. 
• Five cyclical sectors have led the S&P 500 higher from its March 23 low.  
• Transportation stocks have begun to turn up with rails and air freight leading the way even as airlines lag. 
• Value stocks have outperformed growth stocks over the past two weeks, a sign of a broadening in investor appetite for equities.
• Last week’s economic data showed stabilization in consumer confidence measures as well as signs that the labor market may have seen its worst. 

As states across the US continue to reopen segments of their economies from the Covid-19 lockdown worries persist that if the re-openings are too-much-too-soon there could be a resurgence of the cursed virus.

So far however, the re-openings stateside and in many communities around the world have been successful at beginning to move toward a more normal existence without evidence of surges in new cases or death counts. As healthcare professionals monitor the progress that’s being made on their respective home fronts business activity and traffic volume in a number of cities has picked up some.

It’s not an immediate turnaround nor should one be expected. We look for a progress not perfection “work out” period over the next few months as businesses, schools, government agencies and consumers move toward yet another “new normal” this time around in the process of emerging from a health crisis induced economic shutdown which has caused unprecedented levels of societal and economic disruption in the US and in countries around the world.

A “pre post-Covid” environment on the pandemic front is what the citizenry of the world will have to live with until a vaccine is found to be effective and suitably tested and while drugs of greater efficacy are found to tend to those who become afflicted with the dreaded virus.

A ramp up in geopolitical risk brought about by Beijing’s recent decision to impose national security legislation on Hong Kong has increased the already elevated tensions between the US and China. This has generated further uncertainty as to what Hong Kong’s future will mean for its citizenry, its renowned financial markets, and the status of its globally diverse business community.

The relationship between the US and China is likely to deteriorate further before some diplomatic measures can be found to manage what is a new Cold War between the countries that is likely to last into the visible future with both nations appearing more diametrically opposed from an ideological perspective than they’ve been in decades.

We would expect that with China’s dependence on foreign buyers for its exports some way to ease the tensions could be found diplomatically once Covid-19 leaves center stage on the minds of world leadership. The need and desire for trade has acted as a lubricant toward arriving at diplomatic solutions historically. Time will tell.

A tragic event in Minneapolis that occurred last week has seen not only demonstrations expressing grief and indignation in the community in which it occurred but in a number of other cities stateside over the past few days. Unfortunately acts of violent protest and vandalism have resulted in injuries and destruction of property in a number of communities and cities across the country.

The crowds generated by the protests have resulted in concerns by health officials that the proximity and massing of people in demonstrations without masks and the failure to practice social distancing while protesting could undermine recent efforts and progress made in slowing the spread of Covid-19.

In this first week of June investors will be weighing all of the above along with a brace of economic data, the remaining Q1 results of companies yet to report as they ponder which direction the equity market will take next and the election primaries that lie ahead.

Stocks have rallied powerfully from the low of March 23rd. As of last Friday’s close the S&P 500 had risen 36% from the March low with six of its 11 sectors outperforming the underlying benchmark. As much progress as the benchmark has made from a severely oversold level in March the S&P 500 stands 5.77% lower from where it began the year with just three of its 11 sectors showing a positive price return from the start of the year and only four sectors in the same period outperforming the underlying benchmark.

With the S&P 500 having posted six weekly gains in the past ten weeks since the bottom on March 23rd traders and nervous investors this week will likely look for a catalyst that could offer them an opportunity to take some profits near term without FOMO (fear of missing out).

That said, even with the consensus forward earnings multiple back at a five-year high, stocks could continue climbing the proverbial wall of worry with economic reopenings and progress on the Covid-19 front.

It wouldn’t be the first time in market history that the market’s forward multiple fattened as investors looked out further ahead to economic recovery from a crisis while consensus analyst projections were still being cut—darkened by near-term uncertainty.

Expectations are for economic data released in coming weeks to continue to reflect the shutdown effect for some time even as the economy moves toward a reopening and nascent recovery. News of progress on the road to an economic recovery could help offset pressure on the equity market from near-term challenges stemming from geopolitical, health, and societal risks.

We are reminded once again of the words attributed to the great American author Mark Twain, “...history may not repeat itself but it often rhymes”.