Eye on the Markets - 2020


Markets React to Economy Reopening

By Ketu Desai

The equity market recovery continued in May. Optimism among investors is building behind reopening, especially from the highest GDP states such as California, New York, and Texas. Vaccine and treatment development further contributed to the optimism. According to the WHO, there are 10 vaccines in clinical evaluation today and 114 in preclinical evaluation. That is a lot of “shots on goal" from some of the world's smartest people. Reputable companies such as Pfizer, Johnson & Johnson, AstraZeneca, Merck, and Moderna have all had encouraging results and/or statements. Scientific momentum combined with Fed support has kept a bid underneath the market. The Fed's balance sheet has nearly doubled from a year ago, and money supply is up nearly 20 percent just this year. Money market assets are at $4.8T, an all-time high, both a record for institutions and retail. If the scientific momentum continues, the vast amount of liquidity will continue to look to the equity markets for a home.

The economic data has been absolutely horrific across the board. This will likely go down as the deepest recession in history, but it could also go down as among the shortest. That said, there are a number of data points indicating that we have already bottomed. Economic series such as consumer confidence, Empire Manufacturing, Philly Fed manufacturing, continuing claims, and Markit PMI have turned up. Companies such as Apple, Facebook, Google, Southwest, Expedia, Abercrombie & Fitch, Target, and Starbucks, have indicated they are seeing an uptick in activity. Apple's mobility data indicates driving is above its baseline. Delta added 200 more flights for June, and may add as many as 300 for July, due to an increase in demand. TSA throughput numbers have more than doubled from the bottom. JP Morgan's credit and debit card spending numbers also are moving upward. Housing and home improvement are another area that is showing an increase in activity. Lowe's same store sales were up 11.2 percent, while Home Depot's were up 6.4 percent. New home sales rose in April, home buying demand according to Redfin is up 16.5 percent from pre-virus levels, and more than 40 percent of homes faced a bidding war in the past month. Millennial family formation, low rates, and a potential secular shift away from dense populations could drive housing for years to come. Each housing start creates four full-time jobs, thus, adding 500,000-900,000 in US starts per year is 2mm-3.6 million additional jobs, which not only has an important multiplier effect, but also could be the foundation of our recovery.

The market is at a point where it is still unclear whether this is a bear market rally or the beginning of a new bull run. From a technical perspective, we have retraced slightly more than two-thirds of the losses, which is right around the historical level where many bear market rallies have failed. The credit markets are wide open and indicate that this may be more than a bear market rally. High-yield net issuance is up $56.4bn, or up 66 percent versus 2019. Investment-grade issuance is on track for $1.6 trillion gross, $825 billion net, the highest ever on record. Even companies such as Boeing and Carnival Cruise have been able to get large deals done. The recovery in oil, iron ore, and copper prices would also corroborate with credit markets. That said, many risks remain, and a barbell approach to an equity portfolio has merit. On one hand, the secular winners, which have been outperforming throughout the crisis and could be the new defensive stocks, in cloud, payments, software, semiconductors, biotech, and healthcare balanced with recovery plays across value, cyclical, and small caps. The rotations are violent and headline driven, portfolio balance is critical.

Looking forward, the market will continue to focus on all things COVID, on signs of economic bottoming, and on China relations.

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Ketu Desai is the Principal of i-squared Wealth Management Inc. ( www.isquaredwealth.com), an investment management firm based in New Jersey. ketu@isquaredwealth.com