The Market's Last Dance?

Fred Imbert and Thomas Franck of CNBC report Wall Street sell-off gains steam, with Dow dropping more than 600 points to start new month:
Stocks slumped on Friday as shares of Amazon led the major indexes lower on the month’s first day of trading following its first-quarter results.

The Dow Jones Industrial Average fell 622.03 points, or 2.5%, to 23,723.69 as Dow Inc and Exxon Mobil each fell more than 7%. The S&P 500 dropped 2.8% to 2,830.71 with consumer staples and communications stocks leading the broad market index down. The Nasdaq Composite closed 3.2% lower at 8,604.95 as a host of big-tech names fell.

Tech titan Amazon led declining stocks on the week’s final day of trading with shares down 7.6% after announcing plans to spend all its second-quarter profits on its coronavirus response. The e-commerce behemoth also posted a first-quarter profit that missed analyst expectations.

Apple reported quarterly earnings that topped analyst expectations, but its revenue growth remained flat on a year-over-year basis. It also did not offer guidance for the quarter ending in June amid uncertainty over the coronavirus outbreak. The tech giant’s stock gained 1.3%.

Both Apple and Amazon are among the companies that led the S&P 500′s comeback from the late-March lows and were two of the best performers in April. Amazon rallied nearly 27% in April while Apple jumped 15.3%.

Also weighing on sentiment was the possibility of another skirmish between China and the U.S. after White House economic advisor Larry Kudlow said the Chinese will be held accountable for the coronavirus.

“There’s no question about that. How, when, where and why — I’m going to leave that up to the president,” Kudlow told CNBC’s Squawk on the Street.”

Those comments came after President Donald Trump told reporters he suspects the virus came from a lab in China, but did not offer evidence to support that claim. Tensions between China and the U.S. had been kept in check ever since both sides reached a phase one trade deal in late January.

“This has been brewing over the last couple of days ... so there’s fear of another trade war brewing in the middle off all this,” said James Ragan, director of wealth management at D.A. Davidson, noting Trump has mentioned the possibility of using tariffs on China. “The last thing you want to do in a recession is raising taxes.”

“There’s no policy that’s been crafted yet, but I think the market is reacting to that a bit,” said Ragan.

Wall Street was coming off its biggest monthly surge in over 30 years, with the S&P 500 gaining 12.7% while the Dow advanced 11.1%. It was the third-biggest monthly gain for the S&P 500 since World War II. The Dow had its fourth-largest post-war monthly rally and its best month in 33 years.

The Nasdaq Composite closed 15.5% higher for April, logging in its biggest one-month gain since June 2000.

Investors pointed to both the slide in Amazon equity and an opportunity to take profits after a strong April for the downward pressure on Friday.

“A historically strong April in markets ended on a down note as more soft economic data offset fading optimism for coronavirus treatments while earnings were mixed,” wrote Tom Essaye of the Sevens Report. Stocks “are sharply lower mostly on continuation from yesterday’s selling as markets digest the recent rally, although AAPL & AMZN earnings were mildly disappointing.”

Those gains were partly driven by hopes of reopening the economy sooner than expected.

Stocks that would benefit most from that reopening jumped at the end of March, including Carnival Corp, MGM Resorts and Kohl’s. However, those shares all fell Friday, down 4%, 6% and 1.1%, respectively.

Hope for a potential treatment for the coronavirus has also helped the market make a comeback. Earlier in the week, Gilead Sciences said a study of its remdesivir drug conducted by the National Institute of Allergy and Infectious Diseases met its primary endpoint.

The number of new infections around the world has also fallen in recent weeks, leading some countries and U.S. states to slowly reopen their economies.

But Phillip Colmar and Santiago Espinosa, strategists at MRB Partners, urged investors to remain cautious.

“The sharp relief rally in equities has now moved ahead of underlying fundamentals, leaving room for near-term disappointments,” they said in a note to clients. “Many authorities are looking to reopen their economies but doing so safely and to near previous output levels will require a series of medical breakthroughs and widespread distribution of the treatment.”

More than 3.2 million virus cases have been confirmed globally, according to Johns Hopkins University, with over 1 million infections in the U.S. alone.
Richard Henderson, Robin Wigglesworth and Katie Martin of the Financial Times also report that US stocks close out best month since 1987 in global rebound:
US stocks notched their biggest monthly rally since 1987, cutting the coronavirus-driven losses on the S&P 500 this year to about 10 per cent, despite an economic shock that towers over the financial crisis a decade ago.

Stock markets have notched up healthy gains in April despite the grim performances of national economies, pushing the FTSE All World index of global stocks to its best month since 2011. UK blue-chips briefly entered a bull market this week, up more than 20 per cent from their recent lows.

Some investors have expressed doubts about whether the rallies have further to run, but are reluctant to bet against the massive interventions by central banks and governments around the world.

“This rally in equities is clearly not driven by fundamentals — it’s driven by the liquidity support from the Federal Reserve,” said Torsten Slok, chief economist at Deutsche Bank Securities. “Companies are getting cash to keep the lights on through the significant support to credit markets.”

The S&P 500 index closed 0.9 per cent lower on Thursday, but gained 12.7 per cent in April. That is its biggest increase since January 1987, and close to the strongest month since October 1974.

The rally has further bolstered the tech groups that dominate the US stock market. Amazon and Netflix have both gained more than 40 per cent from their mid-March lows, benefiting from the shutdowns around the world that have kept billions of people indoors, reliant on home delivery and streaming entertainment.

“The best buy out there is Amazon — if the virus continues, Amazon wins; if the virus stops, Amazon wins,” said Andrew Left, a short seller who runs Citron Research. He has trimmed his negative bets on US stocks and put more money into the Seattle-based company in recent weeks.

“The markets are on a sugar high right now,” he added. “They’re not making much sense to me.”

Gilead Sciences, the California-based pharmaceutical group, is also among the best performing stocks this year with a gain of 29 per cent. The company added to the optimism on Wall Street on Wednesday after a trial found that its antiviral drug Remdesivir hastened patients’ recovery from coronavirus.

For weeks investors labelled the run in stocks that began after markets hit their lows on March 23 as a “bear market rally” — a short jump before another drop. However, this has been replaced by a “fear of missing out” as the effects of trillions of dollars in government spending lift markets.

“You have the FOMO. Once you get this strong rebound then you get more and more people nervous about missing out on the rally,” said David Riley, chief investment strategist for BlueBay Asset Management.

Mr Riley and others point to a big gap between signals from the commodities and bond markets — which indicate expectations for a long period of low growth — and stocks, which are pricing in a strong rebound for economic growth and corporate earnings. “It’s a tug of war between [central bank] policy and fundamentals, and right now, policy is winning,” he said.

That support from central banks is not the only fuel for the rises in stocks, although such actions do tend to boost riskier assets. By firing up bond prices and crushing yields, it also helps to make stocks more alluring.

Meanwhile, investors have been encouraged by the slowing spread of the virus and the prospect of a vaccine, however distant.

“The rollout of an effective Covid-19 treatment could contribute to a sustainable end to lockdowns, improve consumer confidence, and boost the global economy and markets,” said Mark Haefele, chief investment officer for UBS Global Wealth Management.

In addition, expectations for economic growth and corporate health are already so low that even the release of dire data and corporate profits are not enough to foster disappointment. “Earnings are dreadful, but we know that,” said Mr Riley at BlueBay.

Still, deep concerns persist. US companies’ earnings are set to drop 16 per cent in the first quarter, according to Credit Suisse estimates, and may not fully recover for years. The US economy is also facing a sharp contraction, with 26m Americans losing their jobs in the past five weeks.

On Wednesday, the US Bureau of Economic Analysis revealed that first-quarter economic activity fell at an annualised rate of 4.8 per cent, a swifter and deeper drop than feared.

“Once you get into the second quarter, you will get more earnings, more guidance, more defaults picking up and maybe that provides the catalyst for a pullback,” said Mr Riley. “But right now, the pain trade is higher.”
It's Friday, time for me to cover these markets again, so let me cut to the chase and share my thinking:
  • Somewhat surprisingly, the great market disconnect I wrote about two weeks ago continued throughout all of April, in a somewhat sick April Fool's joke.  
  • I continue to believe this powerful rally was led by two things: The Fed injecting massive liquidity into the financial system, buying up risk assets like corporate bonds and global pensions rebalancing their portfolio to buy more stocks at the end of March following the sharpest monthly selloff in decades.
  • Earlier this week, I discussed IMCO's insights and followed that up by how they are weathering the pandemic. Bert Clark, IMCO's CEO stated they are likely to focus on rebalancing portfolios where market declines have pushed weightings out of whack, even if that means buying stocks when others are steering clear out of fear. It's not just IMCO doing this, all global pensions and sovereign wealth funds are rebalancing after a big monthly gain or loss in global stock markets.
  • The economic data in the US is going from bad to worse. This week, we learned more than 30 million Americans have filed unemployment claims over the last two months, as the global coronavirus pandemic continues to take its toll on the US and and worldwide economy. This morning April manufacturing PMI registered an 11-year low of 41.5 and the New Orders Index is at its worst since the 1950s, standing at 27.1 and signalling a major US recession lies ahead (see full April ISM manufacturing report here).  
  • Despite the fact that the US economy is reopening slowly, I remain concerned about a second wave of infection and the real possibility of a coronavirus depression later this year, early next year. Many small businesses will go bankrupt, millions of jobs will be wiped for good. Modern monetrary theory (MMT) will gain prominence and  governments around the world might need to implement universal basic income (UBI) but there will be political pushback. 
  • Even the Fed is warning of weakness ahead, stating it clearly this week: "The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals." 
  • As far as stocks, I believe this April Fool's rally was the last dance. Yes, the Fed is cranking up its balance sheet to unprecedented levels, backstopping risk assets, but if you're relying on the Fed and other central banks to lift stocks to record new highs, not only will you be sorely disappointed, you will feel financial pain as we enter what is likely to be the longest bear market since 1973-74. It will be very volatile, there will be more bear market rallies, but the trend will be down over the next six months and possibly longer. My thinking is sell in May and stay away and others have written great analysis on why May is a turning point for stocks. Add to this renewed trade tensions with China, and this market is done!
  • Importantly, any way you slice it, the new normal is even more deflationary than pre-COVID days and pain will be felt across public and private markets.  
I can't stress enough the last two points. So many people believe the Fed is going to save the day no matter what by ramping up its balance sheet.

Earlier today, I read a comment on how a Goldman Sachs manager is preparing for a post-Covid world and noted this:
“You want to take advantage of this dispersion and possibly find these names that haven’t been as resilient as the rest of the market, therefore providing higher upside,” she said by phone this week. “You need to look beyond the mega-cap, very resilient tech names to find those recovery opportunities.”

That big gaps would open in valuations is one thing people got right when trying to forecast the current earnings season, which has come without the aid of reliable estimates. Indeed, many professional traders were excited by the prospect of a market thrown into chaos by the pandemic’s economic consequences, believing it would be an opportunity to exploit their real-time edge.

Equity markets have shown tremendous resilience in the face of tough economic data thanks, in part, to intervention by the Federal Reserve. The central bank’s balance sheet has ballooned in recent weeks, passing $6 trillion, with some economists projecting it could top 50% of U.S. GDP by the end of the year. Thus, one time-honored rule rings loudest at Goldman.

“Don’t fight the Fed,” Koch said by phone this week. “The sheer volume of monetary support and also what they’re buying has really removed a lot of the left-tail risk for equity markets and that’s being reflected in the current relatively resilient levels of the S&P 500.”

Her recommendation to clients? Stay invested but be aggressively active in the pursuit of “abundant” opportunities that exist at the company level.

Companies should, most importantly, have balance sheet strength to manage through a protracted shutdown. From a valuation perspective, Koch looks for firms that have been heavily discounted relative to their value. Lastly, she looks for businesses that might be attached to secular growth opportunities her team believes will eventually recover.
She might be right but this Wall Street adage "don't fight the Fed" is about the only bullish thing they can come up with, and if the Fed is ramping up QE Infinity, growth will continue to outperform value, so I'd be careful

If the Fed's balance sheet which currently stands close to $7 trillion does top 50% of US GDP, all that tells me is the US economy and financial system are on a ventilator and this won't reassure investors.

Moreover, longer term, the Fed needs to reduce its inflated balance sheet, and that spells big trouble for stocks, corporate bonds and other risk assets over the next five to ten years.

We are basically witnessing the Japanification of the US economy and market and that means low returns and high volatility are here to stay:

Jim Bianco is bearish on stocks and has been warning investors not to get too excited about the bear market rally:

It is worth noting, however, that unlike me, Jim is also bearish on bonds, so I guess he's calling a top on stocks and bonds:

My own bearish views on stocks align more with what another market analyst is thinking. A. Gary Shilling, longtime deflationista economist and president of A. Gary Shilling & Co., delivered a gloomy take in a recent op-ed published on Bloomberg News, stating a 40% drop could hit by next year after this bear-market rally fades.

“This looks like a bear market rally, similar to that in 1929-1930,” he said, “with an additional 30% to 40% drop in stocks to come as the deep global recession stretches into 2021.”

Bianco and Shilling aren't the only one bearish stocks. Earlier this week, DoubleLine CEO Jeffrey Gundlach said the market could retest its March low as investors could be underestimating the social disruptions from the coronavirus:

“I’m certainly in the camp that we are not out of the woods. I think a retest of the low is very plausible,” Gundlach said on CNBC’s “Halftime Report.” “I think we’d take out the low.”

“People don’t understand the magnitude of ... the social unease at least that’s going to happen when ... 26 million-plus people have lost their job,” Gundlach said. “We’ve lost every single job that we created since the bottom in 2009.”

The so-called bond king revealed he just initiated a short position against the stock market.

“Actually I did just put a short on the S&P at 2,863. At this level, I think the upside and downside is very poor. I don’t think it could make it to 3,000, but it could. I think downside easily to the lows or beyond ... I’m not nearly where I was in February when I was very, very short,” Gundlach said.
Will the stock market tumble back to its coronavirus lows in March? About 92 years of S&P 500 history says there’s a good chance:

Gundlach also shared some nice tweets to support his case:

I too am frustrated by the way these bailouts have been rammed through and looking forward to a full audit which the US Treasury Secretary promised this week (don't hold your breath!).

Gundlach and Bianco are bond guys so people tend to dismiss their views on stocks.

But let me ask you, if Peter Lynch was still managing Fidelity's flagship fund and looking to gain one up on Wall Street by looking at this post-COVID world, do you think he'd be as bullish as the 'don't fight the Fed' crowd? I highly doubt it.

Incidentally, the Fed is really bailing out Fidelity, BlackRock, State Street and Vanguard, the largest index providers, with all this QE and while that may work in the short run, it creates a pack of problems in the long run.

The real truth is the Fed is fighting deflation to 'save capitalism' but it's only exacerbating massive wealth inequality and ensuring a decade-long debt deflationary cycle.

Is this the market's last dance? You bet it is but don't tell that to the wolves of  Wall Street, they're hoping the Fed can keep the music playing for a lot longer but when it stops, many of them will be in a world of hurt.

Who knows, maybe the Oracle of Omaha can raise everyone's hope this weekend but from where I'm sitting, the worse of the economic and financial crisis lies ahead, well after all economies reopen for business.

Below, National Economic Council Director Larry Kudlow joins "Squawk on the Street" to discuss potential retaliation against China, President Trump's latest comments about the origin of the virus, reopening the economy and more.. “On the China business, it’s up in the air. They are going to be held accountable for it. There’s no question about that. How, when, where and why — I’m going to leave that up to the president,” Kudlow said.

Second, DoubleLine's CIO & CEO, Jeffrey Gundlach talks with Scott Wapner on CNBC's Halftime Report about the current state of the financial markets while we navigate the new normal wfh during the Covid-19 pandemic.

Third, Allianz Chief Economic Advisor, Mohamed A. El-Erian discusses the impact the coronavirus has has on the economy, the government's fiscal and monetary response and why the worst is not over.

Fourth, CNBC's "Halftime Report" team breaks down the market action after a week of earnings amid the coronavirus pandemic with Jonathan Krinsky, Bay Crest Partners' chief market technician.

Fifth, for a bit more bullish outlook, Savita Subramanian, Bank of America, discusses banks, Big Tech and the biggest risks to the market with CNBC's Melissa Lee and the Fast Money traders, Guy Adami, Tim Seymour, Karen Finerman and Dan Nathan.

Lastly, like millions of others, my wife and I are absolutely obsessed with ESPN's The Last Dance (on Netflix for Canadians). It is a 10-part documentary that chronicles the untold story of Michael Jordan and the Chicago Bulls dynasty with rare, never-before-seen footage and sound from the 1997-98 championship season. Watch the trailer below but the entire documentary is phenomenal.