This Ain't Checkers, It Ain’t Even Chess
Happy Friday,
Welcome to May - after a tortuous March decline & a rocket ship rally in April, investors enter May asking themselves that proverbial question: should they sell in May & go away?
With the S&P running into technical resistance around the 3K level (61.8% retracement, 200dma) it seems appealing & some profit taking makes sense.
But we ain’t playing checkers or even chess - we are playing speed chess with the algos where the moves come fast and furious.
Our focus is on the reopening process believing that the success or failure of such will dictate risk asset direction. The premise is simple: a failed re-opening means risk assets head south in a hurry. A successful re-openings imply higher risk asset prices as shorts cover, cash comes off the sidelines & markets broaden as Cyclicals/Value start to work.
According to BofA surveys, the betting today is on a U (52%) or W (22%) shaped recovery; only 15% expect a V. That tells one where the opportunity lies.
As I learned climbing in the High Himalayas back in the day, we want to follow in the footsteps of those in front of us, namely Asia and parts of Europe which have already reopened. In China, we note no 2nd waves of Covid-19, the production side is back almost 100% while consumer demand picks up fairly sharply. (We like China’s online voucher program - smart folks will copy it).
S Korea is reopening as are parts of Europe; Austria re-opened several weeks ago & no 2nd wave. Within a week or two much of Europe will be in some form of re-opening with companies copying policies used to re-open in China.
Various US states are also re-opening. The US re-opening seems most risky given the lack of testing capacity while case curves have not been bent to the extent most experts suggest.
From a risk asset pov, JPM has pointed out the speed of the advance has been fast relative to history though akin to past exogenous recessions. Re-opening needs to go well for risk assets to build on their recent performance.
Positives include the all in nature of the global policy response coupled with the multipolar science/tech community effort to develop biomedical responses to Covid-19. The latter could have a significant influence on consumer confidence. A bearish outlook entails fighting both the Fed & the global science community.
In addition there is tremendous liquidity coursing through the world economic system: in the US JPM notes a roughly $1T increase in money market funds & bank deposits over the past 2 months while BofA notes money market funds are closing in on $5T of assets. In Europe broad money growth is running at 7%+ y/y.
The liquidity boom includes the US savings rate which reached 13% in Q1, a 39 year high, as well as in the corporate space where April US IG issuance reached a record $250B. This suggests that as the economy opens companies & consumers will have cash to spend - the question is will they have the confidence to do so?
Amidst the market action we note the Value factor may be starting to bottom. A broader market advance will be a healthier market advance; the Cyclical/Value segments should perform as economies recover. We continue to favor a Tech/Value equity barbell.
Speaking of tech, did you note the comments from Microsoft's CEO: “two years of digital adoption in two months”. Hard to be bearish tech.
We noted the 3rd shoe dropping in last week’s Musings. Commodities remain the runt of the litter with The Economist noting that in real terms its broad commodity index is back at 1860 levels - yes, 1860! At the same time, the A$, a global growth proxy, rose 6% in April.
Two more quick points; first, the USD remains a Tall Poppy - note the collapse in shorting costs though - back to 2015 levels (we tweeted on this) and second note the Trump Admin ramping up its China attacks - for anyone thinking about broad EM equity exposure this could be a headwind given that China is likely to feature as a Trump campaign bogeyman.
As we look to learn from those ahead of us one Q really stands out, especially as a parent with school age children: how can some countries re open schools TODAY and the US can't commit to opening on campus/in person in 5 months? It just boggles the mind.
Enjoy May Day - you have labored long and hard these past few months!