There’s no evaluation yet on when the US economy will reopen, Larry Kudlow said Monday.
Small wonder, then, that the mammoth rally in equities to kick off the week was met with more than a little skepticism in some corners.
To be sure, news on the virus front has improved. Some worried Sunday’s string of relatively positive developments amounted to little more than a false dawn. And while those worries may ultimately prove well founded, there were more encouraging developments on Monday.
For example, confirmed new cases in Italy fell a third day to “just” 3,599 over the past 24 hours.
That’s markedly lower than the 4,316 cases from the previous day, and the lowest in almost three weeks. Daily fatalities rose, though, after recording their lowest increase since February 19 over the weekend.
Meanwhile, in New York, Andrew Cuomo expressed guarded optimism that the outbreak is slowing. The state recorded 599 new deaths, up slightly over the previous day, but the trajectory is less alarming. At the same time, hospitalization rates are slowing noticeably.
“If we are plateauing, we are plateauing at a very high level and there is tremendous stress on the health care system”, Cuomo said, adding that “now is not the time to slack off on what we’re doing” in terms of social distancing.
Hospitalizations rose to 16,837, a 2% increase (there were 358 new hospitalizations, versus 574 the previous day and 1,095 the day before that). That makes three days in a row of single-digit growth in hospitalizations, a far cry from the 20-30% that prevailed previously.
This kind of news flow is lending a hand to equities. Although US stocks declined last week, the drop was relatively pedestrian, and Monday’s blockbuster rally seemingly “validated” upbeat calls from a handful of analysts, including Morgan Stanley’s Mike Wilson, who has (rightly or wrongly) garnered a reputation for being a permabear over the past two years. It was Wilson, you’re reminded, who famously called the Q4 2018 tech rout.
“With the forced liquidation of assets in the past month largely behind us, unprecedented and unbridled monetary and fiscal intervention led by the US, and the most attractive valuations we have seen since 2011, we stick to our recent view that the worst is behind us for this cyclical bear market that began two years ago, not last month”, Wilson wrote. You’ve got to love how he manages to insert a reference to his “rolling bear market” thesis, which he’s generally hung on to through thick and thin, since early 2018.
JPMorgan, meanwhile, sees retail investor behavior “normalizing” as equity underweights are covered and some of the $1.5 trillion in USD cash now parked in government money market funds and bank deposits finds its way back into equities and bonds – back into the market, basically.
A short interest proxy (the Quantity-On-Loan for SPY) had risen sharply during the selloff weeks, but reversed amid the short squeeze that played out two weeks back. “This past week [it] appears to have risen a bit and remains firmly in oversold territory”, JPMorgan notes, adding that a broader short interest proxy (the Quantity-On-Loan for all stocks and equity ETFs globally) “shows that short interest has declined further, pointing to continued short covering for a second week in a row”.
Other strategists gently suggested things could calm down, at least in the near-term. It goes without saying that any deal between the Saudis and the Russians to help at least cushion the blow to crude from what might very fairly be described as the largest demand shock in history would add fuel (no pun intended) to the fire in terms of stoking bullish sentiment.
All of this comes with the usual list of obligatory caveats. Price action recently hardly screams “trustworthy”. Have a look, for example, at South Korea’s Kospi, which is now a bear wearing a bull costume (h/t to Bloomberg’s Dani Burger).
And yet, as skeptics abound and anomalies multiply, Morgan’s Wilson reminds you that “bear markets end with recessions, they don’t begin with them”.
That, he says, makes “the risk/reward more attractive today than it’s been in years”.
Perhaps. But it’s worth noting that the very same tech stocks Wilson correctly said would suffer grievous losses in 2018 are, as of Monday, trading rich to their 2019 average using the 24-month blended forward P/E ratio.