Will the US Stock Market continue to ignore any Bad News?

We have a severe global recession, substantial unemployment and Government deficits combined with on-going grim global COVID-19 infection news – a death toll now standing at more than 600,000 worldwide, including 140,000 in the US.

US coronavirus cases now number nearly 4 million (Australia is just under 12,000) and record numbers of new cases being recorded in many US states have led to California closing schools and even Texas moving to remote learning.

All this continues to be largely ignored by the US stock market in favour of optimism regarding the time-line for the discovery and rapid roll-out of an effective vaccine and more Government and Central Bank stimulus for the US economy. In the meantime, technology stocks are still booming.

The Global Vaccine Race offers hope but not certainty

There is increasing optimism that there will be at least one effective vaccine against coronavirus by the end of 2021, though this is far from assured given many potential vaccines are likely to be either ineffective or unsafe.

Potential vaccines may also provide only short-term protection, so a “return to normal” is potentially a long way off. There will also be major production and distribution challenges, particularly given the virus has spread worldwide, so that all the world’s nearly 8 billion people may need to be vaccinated.

There are reportedly at least 197 vaccine candidates. The first two candidates to reach the critical phase three trials – one from the University of Oxford and AstraZeneca, the other from China – both appear safe and produce immune responses, according to preliminary results published today in The Lancet. A vaccine from Moderna, the U.S. biotech firm, is also heading into phase three trials after similarly encouraging initial results.

There are at least 16 other vaccines currently in clinical trials in Australia, France, Germany, India, Russia, South Korea, the U.K., the U.S., and China, which is experimenting with a variety of vaccine types and has five candidates already in trials.

If the virus is contained through successful development of widely available vaccines, or by some other methods that don’t unduly constrain economies, you would expect a relatively strong economic recovery buttressed by Government fiscal and Central Bank monetary support. Much of the stock market seems to be betting on this outcome. However, if coronavirus can’t be contained for the foreseeable future, you would expect economic conditions to deteriorate and the share market to give up recent gains.

Hamish Douglass from Magellan on the very uncertain outlook

Magellan Chairman and Chief Investment Officer Hamish Douglass has some very interesting perspectives on the last 6 months and what may lie ahead . He says that there are many things that we still don’t know about coronavirus, notes the challenge of finding a cure as well as stressing the complexity and uncertainty of the overall situation. He says, don’t take comfort from the market rally since mid-March or the apparently positive news on the development of a vaccine. This crisis is different to any that have come before in modern history and both positive and negative outcomes are quite possible.

https://2020.magellaninreview.com.au/

It is all about Technology

The FAANGs (Facebook, Amazon, Apple, Netflix, and Google/Alphabet) and Microsoft now make up a quarter of the US S&P 500 index by value, and 8 per cent of revenues, but employ just 1 per cent of the American workforce. These stocks do generally benefit from the changes being wreaked by coronavirus, such as more time at home, and boy have they been booming! The average Price/Earnings ratio is now around 60 times.

Prices change every day, of course, but in the first half of calendar year 2020 these stocks and some other top performers are up substantially. The recent numbers were:

  • Apple +30%
  • Microsoft +36%
  • Amazon +67%
  • Google +12%
  • Facebook +18%
  • Tesla +226%
  • NVIDIA +73%
  • Netflix +53%
  • PayPal +68%

Contrast this with other well known stocks in the S&P 500 Top 30, which are substantially negative:

  • Berkshire Hathaway-20%
  • JP Morgan -31%
  • AT&T -19%
  • Walt Disney -19%
  • Merck -13%
  • Coca-Cola -17%
  • Pfizer -12%
  • Exxon Mobil -36%

If you strip technology out of the S&P 500 you have a sluggish looking share market.

In Australia, most have heard of the phenomenal increase in the market value of the so-called WAAX stocks : WiseTech, Afterpay, Altium, Appen and Xero. An increasing number of tech thematic ETFs have been created which is probably a signal that the tech boom is overdone and the risks for new investors high.

China’s Assertiveness is a serious threat that could have big consequences

China seems to be determined to assert what it regards as its rights against all its neighbours, including India, The Philippines, Vietnam & Malaysia, as well as engaging in trade and diplomatic conflict with nations such as the US & Australia. China’s refusal to accept any responsibility for the spread of coronavirus worldwide is another source of friction.

It seems that there are irreconcilable differences between the two global superpowers, China and America, on pretty much every topic: Hong Kong, Taiwan, the South China Sea, plus many more. If you doubt how serious these conflicts are currently, read the recent statement by US Secretary of State, Mike Pompeo, on China’s Maritime Claims in the South China Sea.

https://www.state.gov/u-s-position-on-maritime-claims-in-the-south-china-sea/

U.S. President Trump recently said that he is not currently thinking about negotiating a “Phase 2” trade deal with China as relations between Washington and Beijing sour over the coronavirus pandemic and other issues.

Irrespective of whether you think China is justified in its positions or becoming a dangerous and disruptive international force, and I think the latter, this has the potential to impact economies very substantially and there is even the possibility of a “hot war” (armed conflict) at some point.

Scott Morrison has alluded to this and warns we must not be complacent. If there is a further deterioration in relations between China and Australia, this could have very negative implications for Australia, given they are our largest export market by far and the largest source of foreign tourists and international students.

 

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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