‘Somber Again’

The second quarter began on a downbeat note as investors grappled with projections of nearly a quarter million coronavirus deaths in the US and digested contractionary PMIs around the globe.

Although the forecasts Donald Trump presented during his daily coronavirus briefing on Tuesday afternoon were the same as those he and Anthony Fauci have been discussing every day since Sunday, the president’s “this is going to be a painful two weeks” remark seemed to resonate, if for no other reason than he appeared uncharacteristically resigned to facts and science which, as most of us know, can be depressing at times.

“We’re going through the worst thing that the country’s probably ever seen”, he added, in the course of suggesting that it might be quite a while before Americans get back to doing normal things, like shaking hands.

In Asia, equities declined and European shares stumbled as PMIs slumped, showing manufacturing activity contracted across nearly all locales, with the lone exceptions of Taiwan and China, where the Caixin gauge perked up in March, mirroring the official PMI released on Tuesday.

Things will likely get worse in April. Movement is restricted in Asia and markets in the West are now feeling the full force of the virus, which will likely depress orders throughout the second quarter.

Shares in Hong Kong and Japan posted large losses to kick off Q2, and news that HSBC, RBS, Standard Chartered, Barclays and Lloyds Banking Group nixed dividends and suspended buybacks on orders from the Prudential Regulation Authority darkened sentiment further.

“The turning of the calendar helps to put the event that is the Coronavirus Crash behind us, but the effects are just starting to manifest”, JonesTrading’s Mike O’Rourke said, in a Tuesday evening note.

“The S&P is trading ~16.5x trailing earnings. It is almost as if it took the occurrence of the crash to return the equity market to close proximity to the historic market multiple”, O’Rourke added, noting that “the key challenge at the moment is that… the market and the economy are incredibly far from 2019’s $157 in earnings [and] despite the return to zero interest rate policy, rising price multiple expansion is not merited during a major economic slowdown.

That, against a backdrop where buybacks will provide less in the way of real-life plunge protection.

The dollar rose again, but measures of funding stress have abated, good news that suggests the Fed’s actions have been at least some semblance of effective, although short-end strategists will be reluctant to sound the all-clear.

“Welcome to April. Q1 was bad in many ways, and the market mood is somber again”, SocGen’s Kit Juckes wrote, on the way to summarizing today’s PMIs and general cross-asset malaise. “All in all, a bad start to the new quarter in asset markets across the board”, he said. “Emerging markets and equities are suffering in tandem”.


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7 thoughts on “‘Somber Again’

  1. The timeline to return to a society that can interact, at will, is very, very long. As laid out by Bill Gates, we have roughly two more months in lock down ahead of us, followed by months and months of rigorous testing/re-testing, during which we can slowly allow people out of lock down ( which will have periods of new lock downs as the virus starts to spread again), with vaccine development occurring simultaneously. Once we have a vaccine, it will take time to manufacture enough vaccine for everyone.
    Evidently, we do not have the right manufacturing facilities- so hopefully those are part of the $2T infrastructure plan.
    I remain in cash- last week showed me that I might miss the correct time to get back into the market because even though I was well informed about liquidity and rebalancing ( thanks, Prof H) , I did not participate in that partial recovery.

  2. The thing that hit me yesterday is that the end of the Great Corporate Buyback Carnival is over, either because companies need to protect cash or are not allowed to participate in the government relief while also buying back.

    Seeing as most investors seem to have a memory that dates back 24 months at best, no one has ever seem a market where price discovery wasn’t driven by Corporate Buybacks.

    1. Going forward, it will be interesting to see what the Compensation Committees do with respect to stock grants/option awards. In the recent past, very dilutive– but offset by open market repurchases.

  3. I have always struggled with quantifying the effect of monetary/fiscal easing( aka money printing) on the US stock markets. I determined it was not something I had to worry about too much as long as earnings were at least flat with prior periods. Now that earnings are most likely declining, I am much more focused on quantifying the effect of money printing on US equities again .
    The direction, I get…. but how much?

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