Our sense is that both buy-side and sell-side consensus has quickly shifted back into the bullish camp. Put differently, most investors that we’ve spoken with over the past couple of days believe that the bottom is in. One of the key reasons cited has been that stock prices have ripped back extremely hard, with many of the most damaged names up +30%, +40%, or more.
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The S&P 500 has now rallied +18% over the past three trading days. Our sense is that both buy-side and sell-side consensus has quickly shifted back into the bullish camp. Put differently, most investors that we’ve spoken with over the past couple of days believe that the bottom is in. Looking ahead, the key reason that we haven’t called a bottom in U.S. equity markets is our view that the U.S. economic outlook is very unlikely to sustainably turn for the better until the new infection rate peaks and rolls over. To the contrary, it’s currently exploding to the upside.
The Senate unanimously passed the $2 trillion ‘Phase 3’ fiscal stimulus plan late last night. There’s tremendous pressure on Speaker Pelosi to get the bill onto the president’s desk quickly. In our view, this package will help improve consumer, business, and, especially, investor sentiment. However, we’re not that optimistic about the fiscal program’s ability to boost GDP growth. In fact, we believe that the transmission to GDP growth will be far below 1-to-1 (0.5 would be shockingly good, in our view).
U.S equity markets rose again yesterday, including the S&P 500 up +1%. Over the past two days, the benchmark index has rebounded +11% from a deeply oversold position. The jump can be attributed to three positive events, including (1) President Trump expressing a desire to relax ‘stay at home’ guidelines in certain regions by Easter, (2) the Fed reducing stress in credit markets, and (3) anticipation of the $2 trillion U.S. fiscal stimulus package that was unanimously passed by the Senate last night.
Over the past few days, we’ve received many questions on framing the potential downside risks to the S&P 500 from a valuation perspective. To that end, a few metrics we’re following to assess potential future downside is historical % drawdowns during the past few recessions and price to tangible book valuation.
U.S equity markets ripped yesterday, including the S&P 500 up +9%, into three positive events over the past two days, (1) President Trump expressing his desire to relax ‘stay at home’ guidelines in some regions by Easter, (2) the Federal Reserve reducing severe stress in credit markets, and (3) anticipation of a $2 trillion U.S. fiscal stimulus package (which the Senate came to agreement on late last night).
Looking ahead, we believe that the key for equity investors will be whether the economy is in a position to rebound when virus headwinds fade. Along this vein, we continue to look for seven key items to signal that a bottoming process has begun. Unfortunately, despite the unprecedented swiftness of the recent selloff, we continue to recommend remaining defensively positioned. More specifically, we remain most concerned about the acceleration in new infection rates outside of China, as well as incoming economic data looking absolutely horrific in the weeks ahead.
Looking out six to nine months from now, equity markets are likely to be either much higher or much lower than they are today. We believe that the key is whether the COVID-19 recession is going to be deep enough and long enough to force otherwise healthy businesses into bankruptcy and/or spark a liquidity/credit crisis that causes an even sharper credit contraction. Put differently, the key is whether the economy will be in a position to bounce back when virus headwinds fade. There’s still time, but the ultimate outcome is unknowable at this point. As such, we recommend remaining very defensively positioned until the U.S. daily new infection rate peaks & rolls over.
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