“As long as the data is improving and the market has the tailwind of liquidity at its back, it’s probably going to continue to rise”, one portfolio manager told Bloomberg on Monday.
Yes, “probably”. And yet, what seems so obvious now was anything but ten weeks ago.
The funny thing is, the liquidity part was a foregone conclusion. Central banks were always going to open the spigots. Indeed, they already had. The Fed was buying bills to alleviate stress in funding markets, the ECB restarted QE in September and, more generally, 2019 saw the largest global net easing impulse (i.e., total rate cuts minus total rate hikes) in years. Let me reiterate: The cuts were coming fast and furious way before anyone knew what “COVID-19” was (figure below).
As for the data, you didn’t need a crystal ball to know that with entire economies shuttered, virtually every, single series was headed for a historic plunge. Once those plunges were on the books, there was nowhere to go but up.
Of course, hindsight is everywhere and always 20/20, and far be it from me to admonish anyone for not loading up on risk assets during the first month of a recession. But here we are, with the S&P flat for the year, and high yield spreads having tightened nearly 600bps from distressed levels in March.
The bottom pane just shows that the recession is official. The NBER said Monday the downturn started in February.
“The committee has determined that a peak in monthly economic activity occurred in the US economy in February 2020 [marking] the end of the expansion that began in June 2009 and the beginning of a recession”, the press release reads.
“The expansion lasted 128 months, the longest in the history of US business cycles dating back to 1854”, the dating committee adds, reminding you that “the previous record was held by the business expansion that lasted for 120 months from March 1991 to March 2001”.
Hilariously, the recession might already be over. Robert Hall, the Stanford University professor who leads the dating committee, said Monday it is “a theoretical possibility” that the downturn only lasted two months.
NBER president James Poterba was quick to point out that no determination has been made in that regard. “The committee doesn’t have a crystal ball”, Poterba said.
Neither do analysts, which is why the S&P has now managed to push through the average of Wall Street’s year-end targets.
The mean was 2,933 as of two weeks ago. Out of 18 official house calls, only four sit above Friday’s close. On Monday, shares powered higher still, leaving the benchmark 10% above the average forecast for year-end.
Bloomberg’s Sarah Ponczek rubbed a little salt in the wounds of those who, like Stan Druckenmiller, haven’t embraced the rally.
As it turns out, every stock in the S&P has posted a positive return since the March nadir.
How about this for a measure of stock market breadth? Since March 23, every single S&P 500 stock has now posted a positive return @markets pic.twitter.com/ee4OXKrhMJ
— Sarah Ponczek (@SarahPonczek) June 8, 2020
Commenting on a prospective correction for US equities, Kevin Muir, formerly head of equity derivatives at RBC Dominion, and better known for his exploits as “The Macro Tourist”, said he doesn’t believe any pullback will necessarily be large.
“Maybe 5-10% in the space of a week. If it does occur, it will happen quickly when market participants are least expecting it [and] as more bears give in, the chances of a correction increase”, he wrote Monday, stressing that any small stab at the short side should be undertaken with defined risk.
“As we see from today’s market action, this bull market is behaving violently”, he went on to caution, warning market participants against trying to “be a hero”.
As far as the duration of any move to the downside, Kevin says he “suspect[s] it will be over before you even realize it’s started”.
That would make a hypothetical correction just like the recession.
I’m thinking back to your pre-covid commentary. There were a lot of things wrong with the economy (and the markets) then, and a virus, plus a few trillions of liquidity, probably won’t be a cure for them.
Definitely not. But as Chuck Prince said so famously, “You gotta dance while the music is playing.” Will it play right up to the election? I doubt it. But there are a lot of people in Washington, D.C., who will do everything in their power to make sure it does.
Makes the schadenfreudist in me almost want the current occupant to get re-elected so he can deal with the resulting mess. I doubt he can keep the wolf away much past this year.
And those people have all the bazooka
I remember sitting in my mate’s office in 2008 confidently stating that there was no way that a few dodgy Americans lying on their mortgage applications could possibly derail the global economy. I wonder what the equivalent conversations sound like today. A few cancelled cruises? A shitty quarter for Olive Garden?
Very good article. The catchy title helps to keep it all in perspective. Thank you.
Prices drive the narrative. Surprising nobody, liquidity is cited as a key reason for the rally. Yet, the macro backdrop is highly fragile. If stocks were to have a week or two of declines, there would be some new narrative, or an old one revived to explain it. Both upside and downside views for the market are not rock solid convictions. How could they be amid this level of uncertainty.