Coronavirus - Market Update (June 9th)

Two weeks ago, I stated that following the initial rebound from the March lows, global financial markets were very much in ‘wait and see’ mode, looking to observe how the economy will restart following the relaxation of the Coronavirus lockdowns. Since then, there has been a major shift in market dynamics. Cyclically-sensitive financial assets, such as bank stocks, for example, that did not participate or significantly lagged in the initial equity rebound, have recently started to outperform. Over the past two weeks, the S&P Bank Index jumped more than 25%, in comparison to an 8% increase in the broad S&P 500 index. In my view, this is a reflection of the fact that improving growth expectations have become a meaningful market driver only very recently. As previously explained, the initial rebound in market prices was driven more by other factors: notably the reduced risk of a financial meltdown, the perception that the pandemic was coming under control, government fiscal support, and massive monetary stimulus.

Some commentators are now highlighting the fact that the equity rally we have just experienced is the strongest 50-day rally on record (the S&P 500 is up 43% from the lows). It is also probably one of the most hated rallies – with many investors remaining on the sidelines. Interestingly, history shows that such strong rallies typically mark the beginning of a longer market cycle, with equity returns usually positive in subsequent months (see table below).

Largest S&P 500 Index Gains (Greater Than 20%)

It does now seem that economies are restarting. In what was a big surprise to economists and investors, it was announced on Friday that US hiring in May rebounded strongly, defying forecasts of a further surge in joblessness. US payrolls jumped by 2.5 million. The Global GDP Growth Tracker compiled by Bloomberg suggests that economic activity contracted at an annualized rate of -2.3% in May, up from a drop of -4.8% in April -- i.e. signalling a relative improvement in activity (a moderation in the pace of contraction).

Global GDP Tracker

We also see this when examining specific activities. For example, mobility data in Sweden shows that, on average, transit has returned to fairly normal levels (see chart below from Goldman Sachs). Furthermore, in countries that have gotten through Coronavirus and related lockdowns in reasonable shape, such as Germany and Austria, even activity in certain hard-hit sectors is starting to improve – see below BCA Research chart on restaurant seating. This provides hope that consumer behavior will eventually return to more normal levels in other countries as well.

Sweden: Mobility Data

Change in Seated Diners (Year/Year)

Finally, we are obviously following the worrying social unrest and political events around the world. This risk is not completely new but is clearly increasing over recent years. Tougher economic conditions that we are now facing due to the Coronavirus-related contraction/recession are further fueling these developments. We continue to monitor it closely and incorporate it into our thinking.

All the best,

Eran Peleg