Wednesday Briefs – 3 June 2020

A weekly commentary on current events. Follow populyst to receive notification.

This week: Equity market; Protests and election; Coronavirus – USA.

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Equity market

The recovery in markets has been faster than most expected. After falling from their February 19 peaks 34% and 30% respectively, the S&P 500 and Nasdaq Composite have as of today rebounded 39% and 41% from their March 23 lows. The Nasdaq is within 2% of its all time high.

This is faster than even we expected, although we were consistently confident of a V-shaped recovery for the markets, if not yet the economy. See our bullish comments in previous Wednesday briefs.

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This robust snapback in the indexes masks significant divergences in sector performance. A large percentage of the gains has come from technology issues. Amazon, Apple, Facebook, Alphabet/Google and Microsoft are all either making fresh highs or are within striking distance of doing so. These five names have played a big role in driving the performance of the S&P 500 given that they have an aggregate 20.4% weighting in the index. That is close to the 20% weighting that the smallest 340 companies together have in the index. Five companies weigh as much as 340.

On the flip side, there are major laggards notably in the energy, transport and retail sectors, with for example Exxon, Delta Airlines and Gap still trading at 31%, 54%, and 36% off their Jan-Feb highs. The fact that Gap for example has so far more than doubled since late March but is still 36% off its high shows how abysmal its decline was in the crash. There is plenty to choose from for a brave value investor but timing and a longer investment horizon are key, as always.

Continued index performance will require a smooth re-opening of the economy without major surges in coronavirus cases and a general reboot of spending in non-tech sectors. We are not yet half way through 2020 but there is still a chance that this will be a good year for returns, despite the high volatility. Needless to say, the massive Fed + Congress intervention was key to making it happen.

Protests and election

If anything can derail the bullish scenario, it would be a large second wave of the virus in the fall and/or an escalation of the protests after the murder of George Floyd in Minneapolis. Although the protests seem to be fading now, they could easily re-ignite in the coming weeks or days.

The tense situation has narrowed President Trump’s path to re-election. Regardless of political bent, market participants generally see him as more market friendly (notably on taxes and regulations) than challenger Joe Biden, but this could change if the protests drag on for weeks or turn into something worse.

In 2016, Trump prevailed by winning Pennsylvania, Wisconsin and Michigan but his narrow margin in these swing states means that they could tip to Biden under reasonable assumptions.

Coronavirus – USA

The virus continues to fade in New York State with fewer than fifty deaths recorded yesterday from a high near 700 per day six weeks ago. Testing seems to be widely available and the percent of those testing positive daily is now below 2%.

The situation is more stagnant in the rest of the country with daily deaths stuck near the 1,000 per day mark for the past ten days. This should be watched closely in the coming weeks as the nation re-opens gradually. Outside of New York State, the percent testing positive is just below 5% daily.

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Access all Wednesday Briefs here.

For the demographics of protests, read So You Want a Revolution.

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