Markets, Economy

Weekly Kickstart (05/25/2020-05/29/2020)

5/26/20 8:00 AM

iStock-626627280.jpgStocks rallied last week, as the S&P 500 rose by 3.20 percent to 2,955.45. The bulk of the increase, though, occurred on Monday when equities posted their largest gain in nearly two months on optimism about another potential COVID-19 vaccine. The rest of the week equities struggled to hold onto gains and ended Friday 0.83 percent below the intraweek high. Some of this selling pressure can likely be blamed on traders simply wanting to take profits ahead of the long Memorial Day weekend, especially with uncertainty now elevated around not just the coronavirus but also the passage of the “Phase 4” relief bill and a possible re-escalation in U.S.-China trade tensions. However, doubts about the market rebound have actually been around since March 23rd, and even with the S&P 500 now 32.09 percent above the panic low skepticism is still very high. For example, the latest fund manager survey by Bank of America Merrill Lynch (BofAML) found that only 25 percent of respondents this month believe we are in a new bull market, whereas 68 percent instead consider this nothing more than a bear market rally.

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Reported cash allocations are also well above the 10-year average, and BofAML’s “Bull & Bear” indicator continues to signal “extreme bearishness.” Such sentiment does not necessarily mean professional money managers expect stocks will soon crash but perhaps just that the rally might have gotten a bit ahead of itself. Similarly, another new investor poll from Deutsche Bank found that a majority of market professionals anticipate that the S&P 500 will be lower in value in three months’ time but higher a year from now. On the other hand, rising expectations for a market pullback could be one of the very factors fueling the move higher in stocks, and fund managers in the BofAML survey even admitted that a continuation of the rally remains the “pain trade” for most investors. Moreover, respondents said that a V-shaped economic recovery ignited by a vaccine breakthrough is a major tail risk they are concerned about (not positioned for) at the moment. In a “normal” environment these survey responses might have been viewed as a contrarian bullish indicator, but given the unprecedented nature of the COVID-19 pandemic it is understandably difficult to have much conviction about where equities are headed in the near-term. Fortunately, the longer-term prospects for both stocks and the overall U.S. economy remain encouraging, and many 401(k) investors through years of routine, tax-advantaged plan contributions can capitalize on the resiliency of America. In the meantime, though, it may be beneficial to continue to use rallies as opportunities to review your portfolio and make sure it is properly aligned with your risk tolerance, nearness to retirement, and other unique variables. As always, we are here to help with any questions you may have.

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To recap a few of the things we learned about the economy last week, the positives included that homebuilder confidence rebounded, mortgage purchase applications rose for the fifth consecutive week, and regional manufacturing activity stabilized. As for the negatives, housing starts fell, building authorizations declined, existing home sales decreased, and millions of Americans continued to make first-time claims for unemployment benefits (although this metric has also fallen for seven weeks in a row). Put simply, the prevailing theme in the recent data is that the backward-looking April figures are terrible but the incoming reports for May have improved or are at least less terrible, supporting our argument that economic activity likely bottomed in Q2. This holiday-shortened week the pace of data remains slow but there are still a few important reports on housing, factory activity, consumers, and inflation scheduled to be released, along with the first revision to the government’s estimate of Q1 U.S. gross domestic product (GDP) growth due out on Thursday.

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What To Watch:

Monday

  • US Holiday: Memorial Day

Tuesday

Wednesday

Thursday

Friday

 

 

Sources: Econoday, BofAML, DB, FRBSL

Post author: Charles Couch

Disclosures