Legendary investor Sir John Templeton famously remarked: “Bull markets are born in pessimism, grow on scepticism, mature on optimism and die on euphoria.” I guess the critical question for investors right now is where does current market sentiment fit 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’s 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. This is similar to investor behaviour that occurred through trade war fits in 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.
After all, ASEAN export economies are at greater risk from the resumption of the trade war.
With 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 trade war 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?
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 gradually reduced economic activity and widening imbalances. Not one day, US job creation was running at a record pace, and the next day 20 million jobs were gone. That’s not a recession that is 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 is nothing in lockdown data that provides any meaningful insight into a post-Covid-19 trade outlook.
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 normalise post lockdown will the data be meaningful as we can effectively gauge the efficiency of the central banks and governments’ extraordinary policy measures have on the real economy.
Consumer Consumption is the Key to Recovery
Consumers have not been buying. Instead, they have 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 hedging against a secondary outbreak and, similar to wartime rationing consumer behaviour. Ultimately consumers will need to feel safe about their jobs and their health before opening up their purse strings.
One positive signal is that people seem prepared to travel as lockdowns end. The May Day holiday weekend in China saw a massive uptake in domestic tourism.
The accommodation-sharing site Airbnb is reporting an increase in bookings in the Netherlands and Denmark.
People are unlikely to travel, even domestically, if they are worried about their jobs or their health.
If this reflects a more confident consumer, investors can then be more optimistic about the speed and strength of the bounce back.
And then, Wall Street will have no option but to move from a sceptic to an optimal level on the “Templeton Scale.”
International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp