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Sunday, May 03, 2020 / 10:57AM / By
Capital Finance Intl / Header Image Credit: Fidelity.com
First the good news: The S&P 500 just
finished its best month since January 1987 with a gain of 12.7 percent in
April. Now for the bad news: The bellwether index is still some 16 percent down
from the all-time record high it touched on 19 February. There is a silver
lining as well: The S&P 500 is up 30 percent from the corona-low visited on
23 March, staging a rally that few could have hoped for, and fewer still dared
predict.
Proving that he is the right man to watch over the world's largest pile
of cash, BlackRock founder and CEO Larry Fink was one of the
first to publicly dismiss talk of a complete meltdown and concluded in early
April that the market had touched bottom.
Mr. Fink has not signaled his intentions for this month. A surprisingly
superstitious lot, investors and analysts take stock in the well-worn advice 'Sell
in May and Go Away', with the latter part
indicating a six-month trading furlough. Addicted to statistics as much as they
are to sayings repeated over many generations, investors recognise that, whilst
historically true, the strategy has been disproved over the last decade
or so with May-to-October runs posting above average returns each year, save
for 2015.
The usually bullish Barry Bannister, chief institutional equity
strategist at Stifel, may yet celebrate tradition as he suspects that the
market may struggle to keep its forward momentum. Sparked by the massive
intervention of the US Federal Reserve, April's bull run is likely to peter out
over the coming weeks as volatility and trading volumes remain high, indicating
a tug of war between bulls and bears both puzzled by the absence of a clear
long-term trend.
Turning to history yet
again, markets usually bounce back vigorously after an initial crash, only to
pull back for a second time before finding a solid foundation to support a
staged recovery. Going forward, this time-tested script would seem to advocate
for caution.
Whilst US unemployment numbers keep rising at an alarming rate,
companies filing dismal quarterly reports and issuing unsettling guidance notes
add to the steady drumbeat of bad tidings.
Some well-respected strategists such as Peter Cecchini at Cantor
Fitzgerald suspect that investors may have misunderstood the joke and cite three reason why the
April rally makes no sense at all: the duration of the pandemic is unknown; the
oil shock puts a damper on earnings; and the inverted yield curve points to a
weakening economy. Taken together, Mr Cecchini argues, these three indicators
should introduce investors to a sense of realism.
There are plenty of other warning signs as well. Stock market rebounds
are often pulled by 'early cycle' groups such as car manufacturing, financial
services, retail, and consumer durables. However, these tell-tale sectors were
lagging far behind as the April rally gathered steam. At large-cap level, the bulls
were led by tech, healthcare, and consumer staples. These steady secular-growth
groups were, in turn, pulled ahead by Amazon, now boasting a stratospheric $1.2
trillion market cap, which accounts for nearly 40 percent of the S&P 500
consumer-discretionary component.
Another sign that the overall market is listing
dangerously to one side comes from the rush of capital into ETFs
(exchange-traded funds) that track that Nasdaq 100 which is dominated by tech,
healthcare, and utilities - all sectors considered somewhat immune to the
pandemic. This part of the market is now showing signs of overheating as
investors take heart when developments on Main Street move from awful to less
bad. A correction seems due.
Making sense of the stock market is unlikely to get any easier as
post-corona recovery plans are unveiled and point to the need for a shortening
of 'cheap and cheerful' supply chains and the subsequent retreat of
globalisation. It is not just US President Donald Trump who is expected to push
for a rearrangement of cross border trade rules and tariffs. European
governments will also actively seek to onshore production and bring backs jobs
lost to low- and mid-income competitors.
The European Commission has already indicated that it will no
longer be as cautious as before when responding to US tariffs on steel and
aluminum. With the exception of China, most US trading partners have exercised
a commendable level of restraint in the face of President Trump's aggressive
stance on trade, considering that before long his tenure will probably end. The
pandemic has, however, changed the outlook. The EU's recently sealed trade
deals with Canada, Japan, Brazil, and Argentina suddenly appear a lot less
attractive than before.
The commission was shocked - mind the understatement - to discover that
even intra-union trade barriers sprung up mere days after the first reports of
the viral outbreak as member states blocked exports of medical supplies.
Outside the EU, governments were also quick to place restrictions on foreign
sales of medical goods with the United Kingdom taking the lead - with a pinch
of irony. The country's departure from the union was, after all, to a
significant extent inspired by a heart-felt wish to unleash its buccaneering
free marketeers onto the world stage.
European governments are also quite sensitive to any moves by China
to directly or indirectly support its manufacturing sector as the country's
factories try to make up for lost time and protect market share. Already now,
untold thousands of containers with unsold consumer goods are being amassed at
gateway ports such as Rotterdam and Hamburg, waiting for the moment to flood
markets. Local industries keep a wary eye on this avalanche coming their way
and are sure to kick up a considerable fuss as soon as these goods leave the
port area.
Just as the European Commission seems no longer willing to accept unfair
US trading practices, it is expected to take on China at the first sign of
renewed tampering with the frayed WTO (World Trade Organisation) rulebook.
When it comes to the introduction of tariffs under exceptional circumstance,
the WTO is actually fairly relaxed and accommodating. All an industry needs to
do is demonstrate that is has been hurt by an externality - not a particularly
high bar to meet given the pandemic.
Another feature of the WTO rulebook sure to gain notoriety is the
concept of 'countervailing duties' which may be introduced to compensate for
state interventions that distort market conditions. It doesn't require any
prescient powers to predict that a number of countries will argue that the
trillions being doled out by governments to help businesses weather the
downturn fully justify the setting of stiff countervailing duties.
A resurgence of protectionism in the post-corona world is almost a
given. Only concerted action by world leaders may prevent global trade from
taking a severe hit. Considering that the pandemic has revitalised the nation
state to the detriment of international cooperation, such a grand deal seems
unlikely at present. Also, the timing of the Corona Recession is unfortunate.
Global trade relations were already strained before the pandemic hit in a
scenario much different from the one at the onset of the last downturn in 2008
when G20 leaders, prodded by then-US President George W Bush, pledged to
refrain from raising new barriers to cross border trade - a commitment that
held throughout the years that followed.
This time around, US Trade Representative Robert Lighthizer struck
an entirely different note, calling his country's overdependence on others for
medical products a 'strategic vulnerability' that needs to be addressed as a
matter of urgency. The 30 March 'virtual' meeting of G20 trade ministers
largely ignored protectionist pressures and resulted in a somewhat lame final
statement that EU trade commissioner Phil Hogan described as 'less
ambitious' than he had hoped for. Of course, Mr. Hogan had some difficulty in
explaining to his peers why the EU's own export controls were not protectionist
in nature.
Close
Whilst jittery stock markets shoot up and down only to stumble sideways,
and protectionism is on the rise, the smart money is shifting to bonds as a
relatively fail-safe and fool-proof way of preserving capital. Present
conditions and the abundance of uncertainty are such that the direction of any
post-corona recovery remains shrouded in mystery.
However, by this time next month, some of those uncertainties will have
dissipated as the world settles into its new normal and finds ways to co-exist
with the novel virus.
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