Eq: Total Market
(New York)
Morgan Stanley made a bold call this week. Their research team has officially adopted what seems like a fairly risky position on the economic recovery: they are saying it will be of the much sought after v-shape. The bank has been calling for a short and sharp recession for some time, but this is the most optimistic outlook they have published. According to Morgan Stanley’s chief economist, “Recent upside surprises in the incoming growth data and policy action have increased our confidence that this will be a deep V-shaped recession”.
FINSUM: We still don’t think this is going to be a v-shaped recovery. More like a U-shape or more likely a Nike swoosh shape. The depth of firings combined with the probable corresponding slow pace of consumer spending will hold back the pace of the recovery.
(New York)
Evercore put out an interesting prediction today. The bank, which has a strong research team, says that the market is likely to be “violent” in the near term. They also added a twist—that it would be “violently flat”, meaning it would have sharps up and downs on but the whole remain around the same levels. Evercore highlights the upsides and risks this way, saying “A significant COVID second wave would continue to drive asset prices lower, but with vaccine development continuing, little correlation between economic re-openings and increased case growth and hospitalization data at the national level”. That said, longer term, they are quite bullish, arguing that there will be a “sharp rebound”.
FINSUM: The news flow is going to mean that stocks are very volatile for the foreseeable future. Increased case growth one day, and then a big jump in retail sales the next.
(New York)
If you are upset about the market’s mini-correction last week, don’t worry, it is going to fall more, says Morgan Stanley. In what comes across as almost an insult to regular investors, Morgan Stanley’s research team says stocks may fall another 7% from opening levels today, but that such a fall was “healthy”. On the whole, Morgan Stanley’s position was positive, saying “We maintain our positive view for U.S. equity markets because it’s early in a new economic cycle and bull market. Last week’s correction was overdue and likely has another 5-7% downside. It’s healthy and we are buyers into weakness with a small/mid-cap and cyclical tilt”.
FINSUM: We have definitely entered a new economic cycle, and with it, perhaps a new market cycle. However, the pace with which stocks came back makes one worry the market cycle has not actually reset itself.
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(New York)
Stocks are tumbling today on worries that a second wave, and a prolonged economic downturn, are becoming a reality. The Dow opened down 2.4%. Several US states have seen their weekly COVID cases spiking, and total US cases are now over 2 million. Coupled with some not-great economic data from around the world, all 11 S&P 500 sectors are down today. One asset manager in London summed up the situation nicely, saying “The timeline for the virus is being extended. It’s becoming clear that it’s a choice of allowing economies to open and take the public health hit, or lockdown countries and take the economic hit”.
FINSUM: This is tough for investors, but it is hard to argue that markets are not being rational.
(Dallas)
Markets tumbled yesterday, and it appeared to happen mostly because of the resignation that a second wave of COVID-19 was forming across the US. In several recently reopened states the number of hospitalizations has been surging, leading investors to fear that more lockdowns—and their corresponding economic damage—could be on the way. Top epidemiologists have been warning of a second wave, and one leading doctor said he worries about states reopening before they have the virus truly under control. “My worry is that we end up in a kind of stuttering, endless loop”, says Dr. Schneider of The Commonwealth Fund.
FINSUM: The market was priced for perfection, and a big second wave didn’t fit that narrative. Hence the 6% fall yesterday. Going to be choppy for a while as the market’s bad news antenna is back up.
(New York)
It seems to all be crashing down as we write. The markets had just eliminated all losses for the year and were above or near all-time highs (e.g. the Nasdaq). However, the market has all he hallmarks of irrational exuberance—indexes priced for such unlikely perfect outcomes that they just can’t stand. At 22x forward earnings, valuations are right around where they were in the tech bubble. The economy is likely to take two years to recover from the virus, but the markets only took two months.
FINSUM: The market seems to be getting a reality check this week. Legitimate fears of a second wave are growing as re-opening states are seeing hospitalizations surge.