Legendary investor Sir John Templeton famously remarked, "Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria." I guess the critical question for investors right now is where current market sentiment fits on the Templeton scale.
In the span of a mere six weeks, the S&P 500 soared by 30% as investors shifted gears from the depths of despair while putting the pedal to the metal on the Fed policy deluges, turning footloose and fancy-free showing few doubts about the duration of the recession and the eventual pace of economic recovery. Which, in due course, could very well provide the reality check of the long-lasting damage this downturn could inflict on the real economy.
In the meantime, easy liquidity and the amount of available Fed firepower for long-only investors in the US seems set to continue to propel stocks higher. Cash on the sidelines continues to suggest that it appears to be a matter of time before Wall Street gets stopped into equities rather than getting stopped out.
Any comments made last week about cracks appearing in markets look like more egg on the face for the perma bears. And although I'm the farthest thing from a perma bear, I'm still wiping my face down after making waffles mid-last week.
But the world is not aglow with optimism as a peek into the trading pad would reveal that May started with more careful positioning from investors in APAC after a subdued to a neutral mood in April. This week could provide a better signpost after a shortened trading week for China, Japan and Thailand, but the pattern was clear on high touch electronic trading desks that saw net selling across most of the region last week. What's interesting, however, is that this is similar investor sentiment to what was noticeable through trade war fits and starts last year as caution prevailed in APAC trading sessions, which contrasted with the more optimistic tone in US markets where risk continued to move up the ladder.
That said, on Friday the critical employment data from the US and Canada came in better than expected. US non-farm payrolls fell by 20.5 million jobs, and unemployment climbed to 14.7%. The silver lining was the 7.9% increase in average hourly earnings which propelled US equity markets into a strong close for the week.
After President Trump exploded last week in a paroxysm of trade war rhetoric, only to be walked back after Chinese trade officials agreed to meet obligations under a trade deal, we should see better trading sentiment at the start of the week in Asia on the back of weekend trade calm and the improved US market outlook.
The current run of economic data is just noise
Why aren't traders reacting to the gory data beats and misses? Likely because most economic data is just noise at the moment.
Indeed, you could go so far as to say most economic data these days is a bunch of garbled and hyperbolic nonsense. This is not a typical downturn; a usual recession slowdown is a result of reduced economic activity and imbalance, not a situation where US job creation was running at a record pace and the next day 20 million jobs were gone. That’s not a recession, that’s government policy shutting things down.
So beats and misses mean nothing for traders. They're guessing what economic life after lookdown will be, and there’s nothing in lockdown data that provides any meaningful insight into a post-Covid trade outlook. And although I own risk in the market, I wouldn't have turned on the Jobs data if it was not for a TV interview call up to give my opinion as to the NFP data which was rolling out at 8:30 AM EST. However, I did graciously put on my analyst – not trader – hat, for diplomacy purposes.
This global recession, as short as it may be, was caused by intentional government policies in the form of global lockdown. No one can be certain about how the recovery will happen or take shape; it's bound to be quicker as people emerge from a legislated sudden stop scenario. Only when people start working again and attempting to normalize to life post-lockdown will the data be meaningful as we can effectively gauge the efficiency of central bank and governments' extraordinary policy measures has on the real economy.
Consumer consumption is the key to recovery
Consumers have not been buying. Instead, they’ve been saving. How quickly they spend those savings will result in how fast investors start dancing to the ring of shopping mall cash registers and propel risk markets even higher.
Consumer pent up demand might not show up out of the gates; they could defer spending those savings to hedge against a secondary outbreak – similar, perhaps, to wartime rationing consumer behavior. Ultimately consumers will need to feel safe about their jobs and their health before opening up their purse strings and people are unlikely to travel, even domestically, if they are worried about their jobs or their health.
One positive signal is that people do seem prepared to travel as lockdowns end. The May Day holiday weekend in China saw a massive uptake in domestic tourism and the accommodation-sharing site Airbnb is reporting an increase in bookings in the Netherlands and Denmark. If this reflects a more confident consumer, investors can then be more optimistic about the speed and strength of the bounce back. Then Wall Street will have no option but to move from a skeptic to an optimal level on the "Templeton Scale."
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies