Can hope continue to drive markets up?
There is a saying that “hope can set your free”...but can “hope” drive current markets up? As we saw these past few weeks the short answer is “yes”.
While other major global financial markets stayed relatively unchanged, the U.S.’ S&P 500 Index was +3.04% last week and -11.03% year to date. Hong Kong and China stocks were muted with the Hang Seng Index and CSI 300 Index +0.33% and + 1.07% last week. Technology stocks, particularly in the U.S. outperformed with the NASDAQ +6.09% last week. WTI oil continued to take a major beating -19.73% last week and -70.08% year to date.
AQUMON’s diversified ETF portfolios were +0.07% (defensive) to +2.26% (aggressive) last week and -0.12% (defensive) to -11.94% year to date (aggressive). The biggest return drivers last week beyond U.S. stocks were U.S. technology stocks and emerging market stocks.
Since we’ve been talking a lot about the coronavirus weekly in our Market Insights we wanted to take a minor break from this and focus a little more on what is driving financial markets recently.
Financial markets diverging from economic realities
Even as we see continued negative fundamental data and news emerge, financial markets waived this off by rallying into a ‘new bull market’ on the back of ‘hope’ in terms of progress in the coronavirus situation, swift action by central banks and the eventual reopening of most developed market economies. The U.S.’ S&P 500 Index jumped an astounding 28.5% since the market low 1 month ago on March 23rd. This caught a lot of experienced investors off guard but most retail investors actually benefited by taking no action and staying invested. Although we don’t have the newest numbers yet, Vanguard recently revealed that more than 90% of their U.S. retail client base “stayed the course” and did not trade once between February 19th (market peak) to March 23rd (recent market bottom).
Economic data from last week continued to be very weak
U.S. retail sales plunged the most in 28 years -8.7% in March. This is important because consumer spending takes up about 2/3 of the U.S.’ Gross Domestic Product (GDP) which is the primary measure of any economy’s strength. A report from the U.S.’ Federal Reserve (Fed) last week showed industrial production also fell 5.4%, the most in 74 years. So the U.S. is getting hit on both demand and supply.
Initial jobless claims continued to climb in the U.S. up another 5.2 million last week. To put this into perspective basically the U.S. has wiped out a decade’s worth (2010-2020) of job creation (22 million) in 4 weeks time.
It is important to point out that currently a portion of the newly unemployed may be ‘furloughed’ which is different from being immediately ‘laid off’. Being furloughed is considered a temporary (but unpaid) leave of absence from work, with the assumption the employee will be brought back at some point if things improve. So if the economy reopens relatively quickly with minimal setbacks there is a chance a sizable portion of the unemployed may be able to regain their prior jobs in a speedy manner.
The U.S. may be looking quite vulnerable at this point but the government and investors are banking on the fact that a successful reopening of its economy along with central bank support will help markets ride out this storm.
This may be a tall order given the intricacies of a viral pandemic and logic would dictate that restarting an engine (like an economy) is almost always slower than turning it off. Having said that the market has proven us wrong lately by being less fundamentally driven so maybe there is reason to be optimistic. How fast it can restart will be the biggest x-factor determining whether this recent market rally can sustain. Managing your risk (through diversification and improving your portfolio’s liquidity) continues to be top priority for investors in this investment environment.
Where is investor money going? Central bank darlings and technology stocks.
The Fed said on April 9th it would move to buy high-yield bonds and exchange-traded funds as part of their program to support small and mid-sized businesses during the coronavirus crisis and investors have taken notice. With the U.S.’ Federal Reserve essentially back-stopping part of the bond market we’re seeing a lot of investors riding this wave of asset buying. Last week U.S. high yield bond funds saw a record US$7.66 billion inflow along with investment-grade bond funds seeing US5.8 billion inflow for the first time since February according to Refinitiv Lipper.
Technology stocks particularly mega cap ones on the NASDAQ are bucking the trend and outperforming broad markets (NASQAQ -3.59% vs S&P 500 -11.03% year to date). This is understandable given generally these technology-forward companies have stronger balance sheets and are better positioned to be less disrupted by the current coronavirus situation than traditional industries. Here’s a snapshot of the year to date return for mega cap technology companies on the NASDAQ:
Even though with an unlimited purchasing power buyer like the Fed behind you investors should be careful not to blindly just follow since 1) a sizable part of the market has already moved in this trade and 2) current market conditions may make it challenging for this to sustain. Focusing on being selective and improving your portfolio’s quality will likely be the wiser choice.
Looking ahead
With the VIX Index down 8.45% last week to 38.15 this is definitely promising to see direction wise but with markets rallying so much recently and with valuations up again (S&P 500 Index price to earnings around 18.92) experience would suggest there may be some short term profit taking pressure in the near term horizon. There is always ‘hope’ for markets (staying optimistic is not bad) but as smart and rational investors we need to be more driven by evidence than just hope. For the time being we all should appreciate this recent strong market rally but should all remain careful about managing our portfolio risk.
If you have any questions please don’t hesitate to reach out to us at AQUMON. We’re always happy to help. Thank you again for your continued support for AQUMON, stay safe outside and happy investing!
Ken
About us
As a leading startup in the FinTech space, AQUMON aims to make sophisticated investment advice cost-effective, transparent and accessible to both institutional and retail markets, via the adoptions of scalable technology platforms and automated investment algorithms.
AQUMON’s parent company Magnum Research Limited is licensed with Type 1, 4 and 9 under the Securities and Futures Commission of Hong Kong. In 2017, AQUMON became the first independent Robo Advisor to be accredited by the SFC.
AQUMON’s investors include Alibaba Entrepreneurs Fund, Bank of China International and HKUST.
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