Barbara Kollmeyer


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.

The chart

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:

The tweet

Random reads

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Author: Barbara Kollmeyer

Source: Market Watch: This is the trap awaiting the stock market ahead of a grim summer, warns Nomura strategist

Critical information for the U.S. trading day

With the long Easter weekend behind us, stocks are pointing to a lower start for Monday as coronavirus fallout swings into focus.

A big question to start the week is whether investors have gotten ahead of themselves, after the S&P 500 managed its best weekly gain in 45 years as the Federal Reserve threw more money at the economy. Banks may have something to say about that Tuesday as they kick off earnings season, shedding light on the damage that’s been done so far by the virus.

Our call of the day, from a team of Goldman Sachs strategists led by David Kostin, says the worst of the market rout is behind us. A “previous near-term downside of 2000 [for the S&P 500] is no longer likely. Our year-end S&P 500 target remains 3000 (+8%),” says the team in a note to clients on Monday.

Why? “The combination of unprecedented policy support and a flattening viral curve have dramatically reduced downside risk for the U.S. economy and financial markets and lifted the S&P 500 out of bear market territory,” said Kostin, whose gloomy stock prediction from last month came the day before a complete market meltdown.

“If the U.S. does not experience a second surge in infections after the economy reopens, the ‘do whatever it takes’ stance of policy makers means the equity market is unlikely to make new lows,” said Kostin.

They also argue, as their chart shows, bear markets usually bottom before economic data’s nadir:

And Goldman is in the camp that believes bleak quarterly earnings to come matter less than earnings per share for 2021. Still, it’s a bit of marked confidence at a time of so many unknowns and no global light switch to turn the world’s economies back on.

Here’s JonesTrading’s chief market strategist Michael O’Rourke with a comment to balance out all that positivity:

“Although the pandemic progress of the past week and the Fed programs are not exactly one-off events, they won’t be repeating on a daily basis as disappointing earnings and economic data will be for the next couple of months. No matter how active the Federal Reserve is, this is not a tape to chase higher.”

The market

The Dow DJIA, 2.22% , S&P SPX, 2.22% and Nasdaq COMP, 2.46% are in the red, while oil prices CL00, -4.11% are back in the black after Sunday’s production-cut deal. European markets are closed for an extended Easter break. The Nikkei NIK, +3.12% and KOSPI 180721, +1.71%, which led a mostly down day in Asia.

The buzz

“Barring some health-care miracle,” the U.S. is looking at 18 months of rolling shutdowns, says, Neel Kashkari, head of the Federal Reserve Bank of Minneapolis. A major pork producer, Smithfield Foods, has shut a big U.S. plant due to rampant outbreaks of coronavirus. Employees at drugmaker Biogen BIIB, +2.67% helped spread coronavirus across six states. The European Commission President has warned against making any summer holiday plans.

Banks are kicking off first-quarter earnings this week, but it will take months to see who will survive a depression-level drought.

Billionaire Mark Cuban isn’t ruling out a run at the U.S. presidency. And Democratic candidate Joe Biden has been accused of sexual assault by a former staffer. His deputy campaign manager claims this “absolutely did not happen.”

The chart

Coronavirus-stimulus won’t be enough to repair a damaged market, says Octavio Costa, Crescat Capital’s portfolio manager. Here’s his chart:

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Author: Barbara Kollmeyer

Source: Market Watch: Goldman Sachs abandons its bearish near-term view on stocks, says the bottom is in

Our call of the day focuses on brewing troubles for the U.S. economy. It comes from Julien Bittel, a multiasset fund manager at Pictet Asset Management, who expects a recession by the fourth quarter of this year. And given a stock market correction has historically taken place in the months before, he has predicted an equity peak this summer.

He sees a lot of similarities between what is happening now and the year 2000—the market peaked in the front half of the year, followed by a recession. Bittel has lots of charts to back up his case, such as this one showing Jolts job openings (which measures U.S. job vacancies), at the lowest since the Global Financial Crisis, often a bad omen for employment:

He also highlighted trouble for the U.S. long-term business cycle, “linked to the less-cyclical areas of the economy so it’s the credit cycle, consumer confidence and the labor markets…these dynamics are all slowing,” he said.

He said what makes his call so contrarian is that most economists see a 25% recession possibility, while equity markets are factoring in only a 2% chance.

“I think investors are a bit naive going into this year, thinking that the gravy trains or rainbows will continue, but in order for that to happen earnings need to come back in a big way,” said Bittel, noting that 94% of last year’s stock rally was driven by a vigorous rise in prices

“A sustained move in equity markets that’s driven by multiple expansion cannot maintain itself unless you get a huge recovery in earnings,” and Bittel doesn’t see that happening, especially if growth is slowing.

His advice? Investors can use the next few months to pad out their retirement funds with stock gains, but then get ready to head for recession havens of bonds and gold, he said. Check out his Twitter account for lots more charts and gloom.

The chart

Author: Barbara Kollmeyer

Source: Market Watch: Get ready for a stock peak this summer, then a U.S. recession, warns fund manager

Winter is coming, literally, as Friday marks the winter solstice and the shortest day of the year— though Wall Street has been feeling the chill since October.

Global equities continued to wobble and Europe’s main index, along with the Nasdaq Composite, was flirting with a close in bear-market territory. Add a shutdown threat and quadruple-witching Friday, and it’s hard to see where the breaks are going to come, as big money managers start to leave for vacation ahead of the holidays.

“Without their guiding hand, more emotional retail traders are in control of the market and they love overreacting to every bump in the road,” says CrackedMarket’s Jani Ziedins. Here’s hoping a few more old hands are on deck to guide us through an update coming later on U.S. growth — at the heart of some hand-wringing these days.

That brings us to our call of the day , which pretty much screams “growth worries are us.”

Here’s Greg Jensen, co-chief investment officer of Bridgewater Associates, the biggest hedge fund in the world: “The biggest theme developing is that you are going to have significantly weaker growth, near recession-level growth in 2019, based on our measures, and the markets are generally not pricing that in,” Jensen told Reuters in an interview.

Bridgewater expects U.S. GDP near a paltry 1% in 2019, with the rest of the world faring slightly worse. Consider that the most recent estimate of third-quarter growth was 3.5%, and that investors stampeded out of stocks this week partly because the Fed trimmed its own forecast to 2.3% from 2.5%.

Meanwhile, the Atlanta Fed is forecasting about 2.3% GDP for 2019.

Echoing downbeat sentiment that MarketWatch readers heard elsewhere, Jensen is also bearish on the outlook for company profits, which he says will “slow significantly more than growth will slow.”

“Although the movement has been in that direction, the degree of [ the market’s decline] is still small relative to what we are seeing in terms of the shifts in likely economic conditions,” says Jensen, as he summed up what they see as 2019’s big story: “weaker growth and central banks struggling to move from their current tightening stance to easing and finding it difficult to ease because they have very little ammunition to ease.”

But it’s not all bad news from the manager, because he doesn’t see a 2008-style blowup because there’s less leverage in the financial system. What we’ll get instead is a torturous “dragged-out” process that “gets market prices in line.”

Publication: Market Watch| World’s Biggest Hedge Fund Says Stocks Aren’t Pricing in ‘Near-Recession’ U.S. Growth Next Year

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