Newsletter: 12th May 2020

Good morning,

 Instead of us trying to understand & explain why markets shrugged off the worst unemployment data in U.S history, we thought it better to turn a blind eye for now and simply share an article we found of interest this morning.

Before we get into it, though, it feels right to first address the chart below, that suggests Australians are being considerably more cautious than our friends in the U.S.

 1.      The stock market is proven indicator of future expectations, and the Federal reserve has flooded the market with cash

2.      Technology stocks are forging ahead, whilst there appears to be hope, too, on the health front

3.      Oil markets are calming

4.      The US/China trade war continues

5.      Shanghai Disneyland reopens and reaches full capacity

 Australian Watch List – Wisr (WZR), Lynas Corp (LYC), Zip (Z1P), Rhipe (RHP)

Global Watch List – Johnson & Johnson (JNJ), Moderna (MRNA), Pfizer (PFE)

US S&P500 & ASX200 Indices Chart

America Reports Worst Unemployment Report in History

Friday morning saw the USA announced gut-wrenching 20.5 million job losses across America in April. Within 60 seconds, the Dow Jones Industrial Average jumped 300-points - a rise that extended from the opening bell through to afternoon trading. The Standard & Poor's 500 index, a broader indicator of corporate America, likewise, surged roughly 1.4%.

Stocks held onto their gains and pushed them higher in the last hour, with the Dow finishing up 455 points, (1.9%) at 24,331. This ended the week with a total gain of 2.4%. The blue chips closed above 24,300, and the S&P 500 finished the day at a 1.7% gain to 2929, closing the week up 3.4%. The Nasdaq Composite Index was up 1.5% Friday; nearly 6% on the week.

Wall Street often behaves counter intuitively, as its reaction to 14.7% unemployment can attest. However, Friday's gains speak to investors' willingness to look beyond the economic wreckage wrought by the coronavirus pandemic.

Here’s Why

1.      The stock market is a future indicator

Investors are betting on how companies will perform in the future, be it a month from now, six months from now, even a year from now. One of the best real-time measures for gauging what investors are thinking, the stock market’s role as a business indicator is based on the collective wisdom of millions of investors who are wagering tens of billions of dollars a day based on untold bits of available information

Howard Silverblatt, S&P Dow Jones Indices, said, "Stock prices are based on expectations. The current bad news was already baked in, as is more to come. But the longer-term hopes and expectations are for a reopening and corporate recovery."

2.      Technology stocks are killing it

Tech giants Amazon, Apple, Facebook, Google-parent Alphabet and Microsoft have been on a serious tear for years, and are behind a big chunk of recent gains. Microsoft shares have jumped 17%, Amazon has soared 28% since the start of the year and Facebook, Apple and Alphabet's gains are hovering near 3%.

"These are the stocks that have empowered the economy and have been the job-creation engines," said Ivan Feinseth of Tigress Financial Partners. "They are enabling people to work at home. Investors realise the value they provide and they create, and believe they will continue to be successful. Like it or not, Facebook kept people who are isolated from being alone."

These key stocks make up 21% of the S&P 500, lifting the Nasdaq composite into positive territory in 2020 even as the coronavirus pandemic has devastated the economy.

3.      There's hope on the health front

Despite the pandemic's terrible toll – 78,000 American deaths and climbing – the global pharmaceutical industry has massed its resources to laser focus on finding vaccines and treatments. Johnson & Johnson, Pfizer and biotech company Moderna are among the many companies racing to find a vaccine.

This week, the Food and Drug Administration signed on Moderna launching the next phase of testing on its coronavirus vaccine candidate. The company began its testing on 45 healthy adults in March, becoming one of the first companies to begin human clinical trials for a COVID-19 vaccine.

Gilead Sciences reported "positive data" in a clinical trial by the National Institute of Allergy and Infectious Diseases for remdesivir, another possible treatment. Anthony Fauci, director of the institute, said the trial showed that "a drug can block this virus".

4.      Oil markets are calming down

The price of oil is not where it needs to be, but it is going in the right direction for producers. US crude oil is back near $US25 per barrel, and Brent Crude, the international benchmark, is up near US $30. Current prices are far better than they were just a couple of weeks ago, however, producers need oil at US $50 or so per barrel to make money. Holders of US crude were paying people to take oil off their hands last month.

"The oil price stabilisation and rise is a ray of light that we are getting through this economic darkness," said John Kilduff of Again Capital. "It's clear there is pent-up demand waiting to be unleashed, and we are seeing that in the rebound in gasoline numbers toward normal levels."

There is still a massive oil glut, but with the US shale industry shutting down wells at a swift rate, the balance between supply and demand is getting close. The US pumped 13.1 million barrels a day a few weeks ago. Now it is closer to 12 million and heading south. Meanwhile, drivers around the world are slowly getting back on the road. Gasoline usage is still down 30% from pre-virus levels, but it has improved from the March 50% decline.

5.      The Federal Reserve has flooded the economy with cash

Investors have credited the central bank with saving the markets from collapse and preventing a new financial crisis from making the recession worse. As trading seized up in March amid the initial panic, the Federal Reserve swiftly launched plans to buy massive quantities of government, corporate and municipal bonds. It launched a program to lend directly to Main Street businesses that fall in the crack between financial markets and existing small-business programs. However, the unusual effort is only getting started.

"The Fed went from bazookas that had mostly run out of ammo and skipped helicopters and went straight to the B-52s carpet bombing tons of cash on the financial markets and the economy," Dr Yardeni said.

The super-low interest rates promulgated by the Federal Reserve have sent investors out of bonds and running to equities in search of returns, helping raise stock prices. The Trump administration launched an unprecedented small-business loan program designed to prevent companies from laying off their workers, part of nearly $US3 trillion ($4.6 billion) Congress approved to counter the pandemic's medical and economic toll.

6.      The US-China trade war truce looks like it will hold

US Trade Representative, Robert E. Lighthizer and Treasury Secretary Steven Mnuchin on Thursday held a conference call with Liu He, China's Vice-premier and point man on the trade deal, to make sure the "phase one" agreement was on track.

But with more than 30 million people unemployed, many economists say it would be a bad idea for the administration to engage in a trade war.

7.      Shanghai Disneyland Sold Out

Disney said tickets to its park in Shanghai, which opens on Monday, sold out in minutes. Although the park will admit only 30% of its capacity, people’s appetite to get out and spend money bodes well for the US company. It is looked at as a model for crowd control, so hospitality and entertainment companies will watch closely.