Stocks set to bound higher despite COVID-19 overshadowing breakout quarter
'A 20 percent quarter gain is quite rare'
Axios markets editor Dion Rabouin says that the economy is in 'bad shape' but that the stock market will be fine as long as the Federal Reserve continues to pump liquidity into the economy.
The S&P 500 just booked its strongest quarter in over 20 years as investors bet that the rebound from the sharpest economic contraction of the postwar era will keep gaining momentum despite record highs in the number of new COVID-19 cases.
The benchmark index, which gained 20 percent during the three months through June, typically sees a strong follow-through after a period of extreme strength, according to Ryan Detrick, senior market strategist at Boston-based independent broker-dealer LPL Financial.
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“A 20 percent quarterly gain is quite rare, but the catch is previous large quarterly gains have actually led to continued strength,” he wrote. “In fact, a quarter later, stocks have been higher the past eight times after gaining at least 15% during the previous quarter.”
The stock market has held its own as the number of new daily COVID-19 infections earlier this week topped 50,000 for the first time. So far, the number of daily deaths has not yet seen a corresponding spike.
The resurgence has caused some concern the fragile economic recovery could peter out as a number of states have slowed their reopenings.
The June jobs report released on Thursday showed the U.S. economy added a record 4.8 million jobs last month as the unemployment rate fell to 11.1 percent. Still, about 21 million Americans received jobless benefits in the week ended June 27.
Wall Street economists are expecting the economy to contract by at least 30 percent during the second quarter before rebounding sharply during the final six months of the year.
“High-frequency data across a number of microdata points has begun to reflect shifting consumer behavior and more restrictive policies in some states with increasing COVID-19 cases,” wrote a team of Goldman Sachs strategists led by Heath Terry. They added that over 40 percent of the U.S. has put reopening on hold.
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Still, strategists at Bank of America, led by Hans Mikkelsen, said in a note outlining implications of broad economic developments on corporate bond-issuers that there are three reasons to remain bullish – at least for the next few months.
The surge in new cases “lowers the probability/severity” of a second wave, according to the strategists, who noted that they remain optimistic because economic data continues to exceed expectations and investors are anticipating a “horrific” earnings season, which leaves room for an upside surprise.
The equity strategy team at Bank of America said their Sell Side Indicator, a measure of Wall Street bullishness, is at a level so low that 12-month total returns have been higher 94 percent of the time with a median return of +20 percent.
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“Sentiment on stocks is still tepid, far from the euphoria one sees at the end of bull markets,” wrote the team, led by Savita Subramanian.