An unexpected report detailing China’s intent to accelerate their farm purchases in accordance with the trade deal sent global markets higher overnight. Also, China’s major shopping event yesterday, aptly labeled “618”, showed a record $136B in sales from just two websites in 24 hours. For comparison’s sake, Amazon’s online sales in the U.S. are slightly higher, but over the course of an entire year!
Futures here are up nearly 1%. Volatility is sure to be higher than normal since it is quadruple witching day where options and futures contracts all expire together. With lackluster volume metrics recently, some wonky things can happen during the day with more traders already at the shore for the weekend.
Last Thursday’s nearly 2000 point drop has been followed by a slow grind higher. Markets have already regained about half of those losses as we start to build a new trading range. This is a constructive process with easy money being made off the lows and valuations getting extreme. Since the drop, there is more chatter on the next stimulus bill, an added $1T infrastructure comment from Trump, and the Fed’s commitment to buying individual bonds. Any drop in equities is met with printing presses. That keeps pushing asset prices higher, from homes to stocks.
Technology winners, who have been able to grow earnings during the pandemic, are back making new highs. The industrial and economically sensitive names continue to show fits and starts. All the money printing in the world will not alleviate some consumer’s concerns with flooding restaurants, shopping malls and recreational locales. There is plenty of demand in spite of this, considering restrictions in place to keep congestion levels lower than desired.
Behaviors have changed. Time will bring people back to normalcy. A vaccine and more news on treatment options helps as well. The stigma of condensed lines, packed subways, sitting next to someone at the theater and shaking hands is here to stay near-term. The Eastern World has been through this already. After getting hit with SARS, H1N1 and Ebola among others, they were more prepared for Covid-19 than us. Wearing masks, avoiding contact and self-seclusion when feeling ill were already commonplace, relative to the U.S.
South Korea is the perfect example. They have a population of 51 million people, yet only saw 280 deaths among 11,000 cases. Stronger immune responses built up after being exposed to 6 previous coronaviruses helps, as well as the established social distance codes they all follow.
The laggards in the market are still the economically sensitive travel, leisure, retail and banking industries. Investors are concerned we will not get back to anything near normal, ever. When looking at the Asian economies over the past decade, one can see this is not the case. Airline travel has ramped up year after year. Starbucks, Pizza Huts, Burger Kings and Taco Bells are opening up at a rampant pace. Auto sales are already above trend. This will happen domestically. Timing is another question, but it will happen. Our knowledge and implementation of social distancing will help make sure we don’t have to shut the economy down again. At some point, those who are fearful today will be back in malls and airplanes.
On that note, economic data points keep rolling in at much better than feared levels. Retail sales in May were expected to be up 8% from April’s levels. They were up nearly 18%. That is still down 6% from last year but trending faster than many thought. Manufacturing data was also well above estimates. Granted, these are not great numbers by any stretch, but the trend is our friend.
Housing continues to be the brightest retail spot. Stay/work from home is here to stay for a lot of people. Upgrading living spaces with decks, pools or an office extension is becoming commonplace. Moving out of crowded cities, for numerous reasons other than health, and into the suburbs has legs. 30-year mortgage rates below 3% in some places are a huge driver. Refinance activity is four times higher than usual. Consumer spending in housing is a large reason why this recession may already be over.
How much of this rebound in spending came from Government handouts that will eventually end is critical for another move in equities. The next stimulus package discussion has partisan bickering on how much more to give the unemployed. On one hand, there are people who need it. On the other hand, it is keeping able bodied workers from going back to their jobs. If Employee A makes $800 / week from unemployment, he has little desire to leave home, work 40 hours a week and make $600. Nevertheless, we need consumers to stand on their own two feet in order to get back to a productive society. It is a difficult problem to solve, even before you put partisan politics into the equation.
Something will be signed and the package just adds to the trillions already thrown at the economy. Globally, the same thing is happening. We have never seen so much stimulus in such a short time frame. The ability for healthcare professionals to find a treatment/vaccine, coupled with reopening efforts advancing safely, could lead the markets higher over time, likely much higher.
The consumer has pent up spending needs. After three months of being cooped up, hitting the shops or visiting friends at an outdoor eatery is accelerating. Places are jam packed, or as filled as they are allowed to be. Prices are higher than usual. These near-term spending data sets may keep crushing estimates and cause money to flow into stocks. That’s what happens when momentum takes over with excess capital being dropped from helicopters. The sustainability of momentum markets doesn’t end well, but could be another 10% – 20% higher from here.
For now, a digestive phase is appropriate. A 500-point trading range in the S&P 500 is starting to look like the base case before breaking out. Valuations are already near extremes. We “should” let the dust settle and wait to see more proof of a strong consumer going back to full-time work. The typical summer doldrums would be nice after the hectic start to the year. Corrections are buyable opportunities.
UK Prime Minister Boris Johnson turns 56 today. Actresses Zoe Saldana and Phylicia Rashad are 42 and 72, respectively. Paula Abdul is 58.
James Vogt, 610-260-2214