Sell in pandemic May and go away?
That is a fair question, as a six-month period that has traditionally been unfavorable for stocks gets under way, with painful coronavirus baggage piled on top.
Our call of the day comes from Nomura’s managing director, cross-asset macro strategy, Charlie McElligott, who is on the go-away side, amid expectations that the next few months will deliver lots of bad corporate and economic news.
“I think for retail investors who probably missed that rally last month and are scratching their heads on why we rallied, the danger is now they try to chase, and think the rally has more legs from here, because much of the macro hedge fund space is really setting up for a move lower again,” McElligott told MarketWatch in an interview.
Those funds have made their equity money and are looking at safer shores like gold, notes McElligott. The Financial Times notes the same.
In a separate note to clients, he said, “we are now in the ‘already squeezed the reasons for optimism out of the toothpaste tube’ phase and into ‘the hard part 2.0.’” Those “reasons” include unprecedented stimulus, an inevitable curve flattening in U.S. cases and deaths, reopening plans and optimism over remdesivir GILD, -1.38% clinical trials.
He said many are looking for the S&P 500 SPX, +0.90% to start dropping towards its 200-week moving average at 2,650. That’s a key technical support level.
Summer could bring “hard economic data collapsing like we’ve never seen before, terrible corporate guidance, stories of pending bankruptcies,” and a second wave of layoffs that will hit the white-collar sector, warned McElligott. Rising trade-war rhetoric from the White House as a presidential election campaign heats up could present more risk, he added.
“That’s why I think folks are getting ready to hit the wall again, with this idea we’ve moved out of stabilization and now we’re back into the harsh reality of what this is,” without having a Federal Reserve boost and no more stimulus checks until things get a lot worse, he said.
The good news? The September to December period could look more constructive for equities, though much depends on if we get hit by a second wave of the virus, said McElligott.
Mike Wilson, chief U.S. equity strategist at Morgan Stanley, sees a 10% correction coming, but expects that 2,650 level on the S&P 500 will be “vigorously defended.”
“In the end, we believe this will be the pause that refreshes, and necessary for the higher prices we expect later this year,” Wilson told clients.
Here’s his chart:
If the Fed does start buying ETFs “broadly and in size” in response to recent requests they do so as to not “let down” the buyers who front ran the Fed April 9th will not and should not be well received on Main Street.
— Jeffrey Gundlach (@TruthGundlach) May 4, 2020
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Author: Barbara Kollmeyer