Switzer on Saturday

Drugs and the second wave are the big watch for the next two months

Founder and Publisher of the Switzer Report
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The headlines from Wall Street overnight were pointing to continued optimism on a drug that will KO the Coronavirus. The US head medico for the virus, Anthony Fauci, gave the thumbs up to the reopening of the economy and the White House is talking more stimulus, which has helped stocks avoid slumping after a solid week for the US market. However, the China problem simmers and represents a drag on stock market enthusiasm.

Ahead of the close, US stocks were up around 3%, making this one of the best weeks since early April. This isn’t bad considering the extent of the US rebound over the past month.

S&P 500

I make it a 31% rebound, which has to be one of the greatest examples of US optimism at work! And this take on the stock market/drug relationship from Matt Stucky, equity portfolio manager at Northwestern Mutual in the US, sums it up neatly: “This week started off really strong and put us on a good trajectory. There’s an increasing probability that something more permanent in nature is going to fix the problem, and that should be discounted in a positive way.”

For bank lovers (and a lot of us are), the positivity on the economy helped Citigroup, JPMorgan Chase and Wells Fargo rise more than 2% each this week. Our banks are equally leveraged to greater optimism on our economic outlook.

The cursed waiting game

I hate queueing. I hate waiting. And I really despise it when the data on the economy and on companies isn’t likely to be reliable. That’s my problem and because you look to me for my insights and those of my expert colleagues, it’s our problem as we wait for the progressive opening of the economy.

We’re waiting to see if a second wave of infections comes along to send us back home. And we’re waiting to see if there’ll be a second-wave problem that could send the stock market substantially down again.

Or there could be a second-wave outcome that’s so good that we’re all back to work by the end of July, footie games are watchable live and unemployment falls faster than expected from the predicted 10% to say 7%.

While on second-wave concerns, I like this from Tom Lee, founder and head of research at Fundstrat Global Advisors: “The future remains uncertain, and thus, we are not confident in saying a second wave cannot happen – but the good news is that there has yet to be a second wave in re-opened economies. We remain in the half-full camp and believe stocks offer pretty good risk/reward, even here.”

Shock, horror our stimulus will be less than promised!

I don’t know if this is a good or bad thing – we will have to wait on that too before we know. At 4.15pm yesterday (Friday 22 May), I interviewed the Treasurer, Josh Frydenberg, for my Switzer Show podcast. Before we kicked off he asked if I saw the latest press release. I said no and he then told me that somehow there was a $60 billion error so the Government’s giveaway would be less than expected.

On one hand it’s good that we’re spending less money. On the other hand, there’s less stimulation. But against that, less spending might be because less government support was needed. However, we don’t know whether it’s because the unemployment threat was less than expected or because bosses found it hard to fill in the JobKeeper forms!

That’s going to be another wait until the true story emerges.

We really need drugs

All this is interesting but the really important waiting game is around when a Coronavirus-killing treatment or vaccine will show up.

Moderna (MRNA)

Over the week we saw how sentiment lifted on rising optimism around a potential coronavirus vaccine. Moderna said Monday that an early stage vaccine trial had shown positive results, with all 45 participants developing Covid-19 antibodies.

Its share price spiked 20% in one day but lost about 9% the next day, when official assessments weren’t as positive as the company’s press release. “The broad market has taken some support from positive treatment and vaccine headlines as a complement to a generally more optimistic economic reopening,” LPL Research wrote Wednesday.

LPL Market Strategist Ryan Detrick did caution, however, that such a comeback is usually accompanied by occasional pullbacks (sometimes as steep as 10%), as investors try to correct sentiment and prices to an appropriate level given bear-market headwinds. (CNBC)

The China syndrome

Here’s another waiting situation that’s stressful, with the rising tensions between China and the US. On Wednesday, the US Senate passed a bill that could ban Chinese companies, such as Alibaba and Baidu, from listing on U.S. exchanges. That measure was passed after President Donald Trump said in a tweet referring to the coronavirus that the “incompetence of China” caused “this mass worldwide killing”.

In 2018, the Trump tussle with China cost the S&P 500 19.8% from August to December. When he sorted it, our stock market put on 20%! Waiting for the likes of Donald Trump and Xi Jinping to become buddies again might have to be after the November US election. And that’s the kind of wait that drives me mad.

And China was behind the S&P/ASX 200 Index falling 53 points (or close to 1%) on Friday to 5497. And the Oz dollar copped the backwash, falling 0.3% to US65.43 cents.

A welcome surprise was the 16.64% surge in the share price of Super Retail Group but there doesn’t seem to be an overwhelming reason to explain it, except that people bought ‘stuff’ when they were locked up.

Despite the China challenge, the Index was up 1.7% for the week on a rosier outlook for the world economy that helped commodity prices and mining stocks.

What I liked

  • This headline from CommSec’s Craig James: “Green shoots of recovery?”
  • The weekly ANZ-Roy Morgan consumer confidence rating rose by 2.2% to 92.3 points. Sentiment has lifted for seven straight weeks and is up 41.4% since hitting record lows. I interviewed Treasurer Josh Frydenberg for my Switzer Show podcast next week and he really likes this indicator as it’s a sign that his policies and the beating of the Coronavirus so far, plus opening up moves, are having a positive effect on consumers.

What I didn’t like

  • This from the CBA: “The impact of the economic shutdown to control the spread of Covid‑19 continued to dominate the Household Spending Intentions readings in April 2020. Large declines were experienced in Home Buying, Travel and Entertainment spending intentions. Health & fitness spending intentions remained at elevated levels, Education spending intentions were down modestly, while Motor vehicle spending intentions have begun to roll‑over.”
  •  ‘Preliminary’ retail trade fell by a record 17.9% in April after rising a record 8.5% in March. But these numbers were distorted by the crazy shopping for toilet paper and other lockdown supplies people thought they needed in March. The number for both months reflect this craziness.
  • The fact that economic data, like the news above, about March, April and May, doesn’t help me work out what will happen. Any backward-looking data has to be bad. That’s why I’m looking for more “now” statistics so we can see how jobs are going and how consumers are feeling right now.

Gee, I hope he’s right

Scott Wren, senior global market strategist for Wells Fargo Investment Institute, told CNBC this week that his team is factoring in an “out of recession” scenario for the US sometime in June! Well, that’s what the stock market seems to be saying but we know share players can overreact to the upside and the downside.

He says we have a three-to-six week wait and virus news has to keep on improving. The reopening phase for the US and worldwide has to add to positivity.

Wren said “halfway through a recession you start to see financials doing better, small caps doing better…”. And that’s what Wall Street is starting to see.

That 31% rebound of the S&P 500 Index since March 23 has even shocked me!

Gotta love those optimistic Yanks. I can’t wait to get over there and congratulate them!

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The week in review:

On our YouTube channel this week:

Top Stocks – how they fared:

The Week Ahead:

Monday May 25 – Preliminary international trade (April)
Tuesday May 26 – Weekly consumer confidence (May 24)
Wednesday May 27 – Construction work done (March quarter)
Thursday May 28 – Business investment (March quarter)
Friday May 29 – Private sector credit (April)
Friday May 29 – Motor vehicle census (January)

Monday May 25 – US Memorial Day public holiday
Tuesday May 26 – US Chicago Fed National Activity Index (April)
Tuesday May 26 – US S&P/Case-Shiller Home Price Index (March)
Tuesday May 26 – US FHFA House Price Index (March)
Tuesday May 26 – US New home sales (April)
Tuesday May 26 – US Conference Board consumer confidence (May)
Wednesday May 27 – China Industrial profits (April, annual)
Wednesday May 27 – US Federal Reserve Beige Book
Wednesday May 27 – US Richmond Fed manufacturing index (May)
Thursday May 28 – US Economic (GDP) growth (March quarter)
Thursday May 28 – US Durable goods orders (April)
Thursday May 28 – US Pending home sales (April)
Friday May 29 – US Personal income & spending (April)
Friday May 29 – US Goods trade balance (April)
Friday May 29 – China manufacturing & services gauges (May)

Food for thought:

“I’ve suffered a great many catastrophes in my life. Most of them never happened.” – Mark Twain

Stocks shorted:

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.

Chart of the week:

Food retailing fell 17.1% in April in seasonally adjusted terms after a 24.1% rise in March as depicted in this chart from CommSec:

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