We Shall Overcome

We shall overcome.  Markets rallied on Friday after Gilead announced that its antiviral drug Remdesivir improved COVID survival rates by 62%.  Traders took the opportunity to pile into the hardest hit post-pandemic stocks.

 

N O T E W O R T H Y

 

True grit.  I am sure that it is well known by now that the success of the global economy in the months and years ahead will be largely dictated by the path of the Coronavirus.  I remember first writing similar words back in the early pre-lockdown days of the pandemic.  So, if you agreed all you needed to do was sit tight and wait for it.  If you were invested and had a long term outlook, you needed to simply batten down the hatches and stay healthy… maybe pop a few dramamine tablets.  If you had cash to invest your job was to wait for either a containment of the virus or a credible therapy to become widely available.  In the event of any of those, you were to invest in a diversified, long term portfolio which would benefit from an economic recovery followed by a continuation of the now-laid-to-rest super expansion.  So simple, right?  It was not too long after I first started writing notes with tag-lines like “28 Days Later” that stuff really started to hit the fan. Outside of Wuhan China, there were virus spikes in Italy and Spain followed by spikes in deaths.  A spike in the New York area made it the US hotspot prompting a series of rolling shelter orders which led to a jump in unemployment not witnessed since the Great Depression.  Not surprisingly, the high-flying equities markets tumbled and volatility hit record highs.  The economic quagmire was not caused by an unknown economic force or some exotic mathematical theory, it was caused by a mandate to literally pause all economic activity. “Pause” implies that “Play” would be pushed once the virus was under control.  Pressing Play would simply reverse the slide and get the ship moving forward once again.  So simple, right?  I wrote that statement twice to make a point.  One that you probably already know: nothing is simple when it comes to the markets.  In the months that followed the markets initial fall, a recovery was under foot and its driver was not what one would have suspected.  There were no credible therapies announced and the virus was far from contained, and yet the market began to recover.  I am not sure if you remember, but the recovery ended the shortest “bear market” in history.  Did I mention that the market’s descent into bear territory was also the quickest on record?  Soon after, folks started to emerge from their homes, eager to get out and get back to work.  Some states began to relax restrictions and some economic activity began to resume.  The renewed economic activity did its part to support the recovering stock market.  The Federal Reserve however was not convinced that we were out of the woods.  They have been doing their part to support companies, banks, and individuals in an unprecedented stimulus program which was matched in magnitude by the Federal CARES act.  The Fed has been continuously stating that the success of the economy would be linked to the path of the virus.  Sound familiar? Just recently Chairman Powell said as much when he addressed lawmakers on Capitol Hill.  Fed Governors have been echoing a similar prognosis, stating Central Bank’s willingness to continue aggressive stimulus. Meanwhile…. You know where this is going.  I am not going to tell you the statistics of the recently spiking states, I am sure that you have already heard them.  Clearly the virus has not yet been contained, so we can check that one off the list.  How about a credible therapy?  Well, on Friday, Gilead announced that its antiviral drug Remdesivir could reduce virus death rates by as much as 62%, though more exhaustive research would be necessary. Positive, but by no means definitive.  On the vaccine front, many early-stage trials have been pointing to positive developments.  Most of the front-runners are currently embarking on the later stage trials which test for efficacy and safety.  The most optimistic expert opinions on vaccine availability points to sometime in 2021.  More positive but still far from definitive.  So where does that leave the economy and the markets?  With some lockdown restriction easing, the economy appears to be turning around slowly.  Markets, though they have flattened out in the past few weeks remain somewhat bullish with high valuations.  This, despite a very noticeable surge in virus cases and deaths across some of the earlier re-opened states.  It appears that many are learning to live with the virus and are unconcerned with potential health hazards of venturing out.  So maybe there is a case where we can experience a recovery even with cases rising and no credible therapies available yet.  Starting this week, we will begin earnings season and many are expecting corporate earnings to have fallen the most since the great recession.  Of course, beating the expectations will be positive for companies, but investors will be more keen on hearing about the turn-around and, more importantly, their forecasts for the upcoming quarters, assuming they are able to provide them. Seems simple, right?

 

 

THE MARKETS

 

Markets started Friday’s session on shaky legs but ended the day in the green after Gilead announced positive results from its own research on Remdesivir’s ability to lower the COVID death rate.  Healthcare stocks rose but were surpassed by hard-hit cruise lines on traders hopes that all will be good… at some point.  The S&P500 rose by +1.05%, the Dow Jones Industrial Average traded up by +1.44%, the Russell 2000 jumped by +1.7%, and the Nasdaq Composite Index advanced by +0.66%.  Bonds slipped and 10-year treasury yields rose by +3 basis points to 0.64%.

 

NXT UP

 

– New York Fed President John Williams and Dallas Fed President Robert Kaplan will each speak today.

– The week ahead will feature a number of regional fed reports, the Beige Book, Retail Sales, housing numbers, Industrial Production, and University of Michigan Sentiment.  Earnings season starts with the big banks tomorrow, amongst others.

Please refer to the attached economics and earnings release calendars for details.

 

daily chartbook 2020-07-13

econ numbers 7_13

earnings releases 7_13