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Market Could Get a Boost as States Reopen

  • Investors are most focused on the economy’s reopening and any medical progress on the coronavirus, but the post-Memorial Day trading week has a full calendar of economic reports that should reveal activity during the height of the shutdowns. 
  • Important reports include the Fed’s beige book, for a broad view of the economy, April’s new home sales, durable goods, and personal income and spending.
  • Consumer confidence (Tuesday) and consumer sentiment (Friday) may well be the more important reports since they will give an updated view of how consumers view the current situation.
  • There are a few final earnings reports for the first quarter, including Costco and other retailers.
  • Stocks are likely to hang on every medical development and the progress of state reopenings, but there will also be some key economic data in the coming week that should provide a glimpse into the depths of the state shutdowns.

The Fed’s beige book of economic activity is released Wednesday afternoon. April manufacturing data in durable goods is set for Thursday. And April’s consumer income and spending data will be revealed on Friday.

While that should provide an interesting view of how sluggish activity became, the market is expected to focus more on May consumer confidence and consumer sentiment.

“The backward looking data is not going to get any attention paid to it,” said Ed Keon, chief investment strategist at QMA. “It’s going to be terrible, and that’s not going to be a surprise. Confidence has held up pretty well, all things considered. It’s the PPP and unemployment benefits. People who get some support for income seem to be pretty confident.”

Congress is expected to take up changes to the Paycheck Protection Program for small business when it returns June 1.

April’s economic data is expected to be about the worst of the recession, since most state shutdowns extended through a good part of the month, ahead of May reopenings. First quarter gross domestic product is expected to have declined by 4.8% when a second reading is released Wednesday. However, for the second quarter, GDP is expected to decline by a median 33.1%, according to CNBC/Moody’s Analytics Rapid Update, a survey of economists.

Stocks gained in the past week, though rising tensions between the U.S. and China weighed on the market last Thursday and Friday and could become a bigger headwind going forward.

The S&P 500 was heading for a weekly gain of 3%, its second weekly gain in three. A big catalyst came Monday, when Moderna disclosed positive data from a small group of patients in an early trial, but it was a wild week of trading for the company’s stock as doubts arose about its limited results.

On Friday, however, White House health advisor Dr. Anthony Fauci said the data showed promise and he was cautiously optimistic a vaccine would be developed. 

AstraZeneca’s vaccine effort got a boost this week when it received $1 billion from the U.S. Health Department’s Biomedical Advanced Research and Development Authority to develop a coronavirus vaccine from the University of Oxford.

Bear Market or New Bull?

How are we to characterize the stock-market struggle of the past three months and beyond?

By the most simplistic definition, it became a bear market when the S&P 500 dropped more than 20% from its high, which it did on the way to a fast 35% decline over five weeks. It will remain a bear market unless and until the index recovers to the February high. After another winning week, the benchmark is 15% from that record.

But said classification of a bear market encompasses everything from the 1987 crash, the quick 1962 tumble that became a mere footnote in the post-1950 advance, to the grinding multi-year ordeals of the 1970s and early 2000s.

Ned Davis Research has its own checklist to identify a bear market, including either a 30% drop in the Dow Jones Industrials after 50 days or at least a 13% decline that lasts over 145 days. The latter definition tags the 2015-early 2016 downturn as a bear, while most investors viewed it as a steep correction that refreshed the bull market.

Another way to capture the experience of an underwater market and quantify the wear and tear it takes on public psychology and portfolio values is how long the market stays at more than a 10% deficit to its peak level.

Most professional investors seem to be working from a premise that this is a bear market. Nearly 70% of the participants in Bank of America’s monthly global fund manager survey (which captured responses from May 7-14) called the recent rebound a bear market rally. This is something BofA strategists argue shows sentiment to be crowded on the cautious side, a net positive for a bit further upside for stocks.

Stephen Suttmeier, technician at BofA, knits together the contrasting views of this phase by pointing to previous long-running — or “secular” bull markets beginning at a “generational low” which had a severe retrenchment in their seventh year, including 1957 and 1987.

By some measures, the market is stretching the bounds of a bear-market bounce.

Chris Verrone, technical strategist at Strategas Research, points out that the S&P 500′s 40-day surge of nearly 31% is second only to the ramp off the final March 2009 bottom in terms of upside over the same time span. And the other dates of comparable rallies mostly coincide with important, decisive lows in such years as 1982, 1998, 1975 and early 2019.

One notable exception is the strong post-9/11 bounce in the fall of 2001, which gave way to a resumption of a nasty bear market that brought new lows nearly a year later.

Citigroup tracks the global equity market since the recent peak against the path of other confirmed bear markets, which makes it appear the current rally is overachieving for now — but perhaps only because the collapse was so fast and deep.

Retiring in 10-20 years? Here’s Your Best Approach Right Now

Equities have been looking past the bad news — more than 5 million coronavirus infections worldwide and tanking global economies —  in hopes for a treatment and a grand reopening.

There are lots of gloomsters out there, but a few optimists as well, like Ameriprise private wealth adviser Kimberlee Orth, who was ranked No. 2 in the U.S. among her female peers in 2019 by Barrons. Our call of the day is packed with her advice for those 10 to 20 years away from retirement, and who might be feeling uneasy about pandemic damage to their investments.

“If you were already in the stock market on Feb. 1 or March 1 or April 1, and you watched the market go down and those resources are allocated to a long-term goal and your risk tolerance is still suitable, there’s no need to change that because the market is eventually going to go back up,” says Orth.

Orth says she likes stocks right now and thinks prices look good relative to where they were three months ago. “Sectors we like are technology, consumer cyclicals, pharma, and sectors where it may be a little early are airlines, cruises, hotels and restaurants. All of this is going to be wrapped around changing consumer behavior,” she says.

“Among other strategies she is discussing with clients are dollar-cost averaging, the practice of investing a set amount into stocks at regular intervals, thereby spreading out risk. “This could be a real opportunity with the volatility in the market.”

Orth mentioned that Ameriprise started preparing clients for a downturn last fall, selling out of positions and making sure they had enough cash on hand for any near-term purchases.

“We’re going to get through this eventually. The market will go back up at some point, when the economy and the world start to recover. It’ll change, but it will get better,” Orth adds.

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