Hope is “the” Strategy

Commentary

Hype is so passé and the investment strategy du jour is “hope”. It is what has been driving this market instead of anything remotely close to quantifiably certain answers and more or less explains how stocks, after slipping into negative territory from the open, were able to recover after the first hour of trading. So, wherein does this hope reside? The answer is several places:

  • Congress just might fulfill Trump’s request for another stimulus package prior to its scheduled summer recess in first week of August.
  • Dr. Fauci, US designated infection disease expert, expects clinical trial results for treating the virus to be completed by late summer or early fall, an unprecedented timeframe but something to grab when there is no alternative.
  • Businesses on Wall Street and Main Street both are struggling to thrive, let alone survive, but the Federal Reserve is committed to doing whatever is necessary as lender of last resort.
  • Lastly, let’s just hope this nasty virus simply disappears like President Trump said it would, because if it doesn’t then the risk of national bankruptcy might actually be a foregone conclusion given the unsustainable rate of money printing.

Meanwhile in the land of reality, the unabated surge in the coronavirus and the unknown efficacy of any forthcoming vaccines or treatments only increase uncertainty of the extent of economic damage. Technically, equities have continued to climb this and other walls of worry. However, as I wrote yesterday, investor sentiment has definitely shifted. This week the SP-500 outperformed the Nasdaq-100 for five consecutive days to result in a weekly gain @ +1.25% vs @ -1.76% for the latter. Of the FANG stocks, Facebook (FB), Netflix (NFLX) and Alphabet (GOOG) finished the week in negative territory. Apple (AAPL) was the exception managing to eke out a moral victory @ +0.42% as it closed significantly lower than its open or weekly high.

The economic data is just as muddy, but here’s how I interpret it:

  • Consume confidence trumps (no pun intended) everything. If pessimism prevails, it matters not how rapidly Covid19 trends reverse. The pandemic will accomplish what nothing or no one has ever proved able, which is getting American consumers to save vs living from paycheck to paycheck.
  • Residential real estate is another economic driver and indicator of consumer confidence and solvency. An uptick in housing starts is always appreciated, but building permits are stronger indicator. Even though permits have rebounded since April-2020, they remain relatively low to historical levels
  • When a trade partner suffers, everyone suffers. The downward revision for the Eurozone’s GDP growth is a legitimate concern. Although Canada and Mexico represent 34% America’s exports, the EU accounts for another 23%, a figure not to be taken lightly. When one considers this in the context of administrations’s adversarial posture towards its former trade allies, then risk begets more risk.

Market Summary

market performance summary table for equity, treasury bonds, currencies, commodities and real estate benchmark indexes

Market Moving Events

Bullish

  • Central Banks / Fed Reserve: The Fed announced that its Main Street Lending Program will be opened to nonprofits, e.g. hospitals, educational entities and social services organizations, provided they meet certain lending criteria. Previous requirements were a minimum of 50 employees but have now been lowered to 10. Non-profits account for @ 8% or 12.5mm jobs in the labor force.
  • Real Estate / USA: Housing Starts (m/m) in June-2020 @ 1.186mm vs estimates @ 1.169mm and previous @ 1.011mm. Yr/Yr, they increased 17.3% vs previous @ 8.2%.
  • Earnings Surprises / Financials: BlackRock actual EPS @ 7.85 vs estimates @ 6.89; and State Street actual EPS @ 1.88 vs estimates @ 1.59.
  • Commodities / Energy: Baker Hughes most recent update for Oil Rigs @ 180 vs previous @ 181; and Total Rig Count @ 253 vs previous @ 258.

Bearish

  • Consumers / USA: Michigan Consumer Sentiment and Expectations for July-2020 were lower than forecast: respectively @ 73.2 vs estimates @ 79.0; and @ 66.2 vs estimates @ 73.5.
  • Real Estate / USA: Building Permits for June-2020 were 1.241mm vs estimates @ 1.290mm
  • Coronavirus Pandemic: New cases continue to surge in the states of Florida and Texas, both which have the potential to surpass California based upon the trajectory of their current growth rates for the virus. Texas’ Governor Abbot has indicated no intentions of shutting down and Florida’s DeSantis will be hosting the GOP convention in a couple weeks.
  • Economic Growth / EU: The ECB’s Survey of Professional Forecasters (SPF) revised its 2020 GDP forecast for the Eurozone to -8.3% vs -5.5% (previous update in April).

Summary Analysis

As one can see, no available remedies exist for any of the above issues. Under such circumstances, hope is often the last weapon in the human psyche’s arsenal to combat challenges. Until it is abandoned, the (market) game still remains in play. Human nature has a proclivity toward hearing what it wants and believing it when it does. No one is more aware of this than President Trump and his imagination knows no boundaries when it comes to controlling the narrative of America’s bedtime stories. So, dear children, i.e. Wall Street and Main Street, when you awaken from slumber, the only thing that matters is whether it is to a happy ending or nightmare. Until then, rest well by hedging.

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