Has the market moved on from Covid-19? It’s a fair question, given the significant rallies over the last couple weeks in both the equity and fixed income markets.
At Cornerstone, we consider some of the uptick to be “false bounces” due to short-covering and federal fiscal stimulus. That said, it’s reasonable to think the stimulus did secure some sort of floor in the marketplace.
But, as we said last week, there will be more bad news. And it’s come in the form of record unemployment and (understandably) missed earnings. More is sure to follow.
This key question remains – has the bad news been priced in already? Our guess is probably not. But at least we have some reasonable technical indicators now.
Economically, we don’t see a comparison between today and the 1930s. Despite the news reports linking that situation to our current one, there is a big difference.
After the 1929 market crash, there was no liquidity. People lined up at banks to withdraw everything. It’s the exact opposite today. The Federal Reserve is doing everything it can to provide liquidity to the U.S. economy.
Evidence of this can be seen in the Fed’s bond purchase program being extended beyond the usual money markets, commercial paper, and treasuries to include investment-grade and high-yield bond funds. These actions have provided stability in debt and credit markets, causing bounces in both the investment-grade and high-yield indexes. In essence, the Fed is managing credit spreads and the flow of credit when many private creditors and the banking system are unwilling to participate.
From a health perspective, we’re starting to see positive indicators. That’s excellent news because success in this area is critical.
As long as health data continue to trend positive, we believe the first signs of the economy opening will be around May 15. However, that will mostly be for optics because restrictions will still be in place. By June, we foresee a somewhat functional “soft” opening. In or around September 2020, we think there will be a “new normal” of some kind. And in December, economic growth will return.
To recap, the positive health trends and the technical data give us some clarifying confidence that equities have bottomed. But this can’t be stressed enough – our outlook hinges on health outcomes continuing to be positive. As we all know, things can change quickly.
Thankfully, volatility is nearing Earth again.
The VIX Index, a measure of market volatility (more volatility = higher VIX value) stood at 41.67 on April 9, 2020. It soared to nearly double that a few weeks ago. So, clearly things have calmed some.
However, “normal” VIX values are in the teens and low twenties. So, we need another 50 percent drop in the index to feel really comfortable.
A Bull May Be Emerging
All these positive sentiments are supported by the Big Money Index (BMI):
These data indicate we’re about to emerge from oversold territory, which is a forward-looking, bullish market indicator. To be clear though, the BMI isn’t rising because of a lot of buying. It’s rising because the selling has evaporated.
All this means the market must be observed over the coming weeks. We want to see more buy signals, not just a lack of selling. More buying indicates the market is pricing in a more controlled recovery, which is what we want to see before we’re convinced the market has fought off this round of Covid-19.
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