The Edge Singapore published a special feature written by CMC Markets on 5 June 2020, titled "When fundamentals fail". It aptly sums up the equity-economic divide that we are currently seeing in the markets.
You can read the article [here].
The world is still nursing from job losses and business collapses due to the artificially imposed economic lockdowns. Yet, if you have only a window to the world through stock market lenses, you can hardly be faulted to be cheery. It looks to be all sunshine after the torrent of rain in March.
On Friday, the U.S. stock markets jumped, simply because the unemployment rate was much lower than expected (13.3 per cent versus the estimated 19 per cent). The disparity was so significant, it prompted news outlets to investigate why the economists had it so wrong. (You can check out one such article by The Washington Post [here].)
The truth is - as CMC Markets pointed out - amid the death and gloom caused by the coronavirus, people want to HOPE that the worst is over and good times are coming.
Even with the Floyd protests, China tightening its grip on Hong Kong, nearly 400,000 COVID-19 related deaths and the lack of a vaccine aren't enough to dent the jubilant mood on Wall Street.
Hope is indeed a miraculous drug.
Are investors prescient to cast a blind eye to the decidedly dismal Q2 results, and look forward to the second half of the year for glad tidings?
Frankly, no one has the answer.
But one thing is for sure - the chasm has to close. No bull can run forever, when there is blood on Main Street.
The negative base case is for stock markets to face the truth and drop back to recessionary levels. The economy re-opening is a boon, but the consumer behaviour is altered. People are wary about going out to crowded places. With the stringent restriction on number of customers in restaurants and stores, malls are unlikely to regain its liveliness anytime soon. While the government tries its best to create new jobs for the labour force, there is a limit to the number and the private sector is unable to pick up the slack. Work-From-Home arrangement shows employees can still be productive at home without being present in an office environment. Employers review their existing commercial rental arrangement, and decide to do with less. Shops depending on the midday office crowd for brisk business are impacted from a drop in patronage.
On the other end of the aisle is a positive base case for the economy to show resilience and a quick bounce back to pre-COVID-19 activity levels. Jobs are swiftly restored, thanks to the huge stimulus provided by governments in cohesion. The consumer is happy to go out and spurge, having been cooped up in the house for so long. News of a vaccine ready by the end of the year give people hope that we are going to survive this crisis and hence the optimism in the markets is justified. Stock markets rally to new lifetime highs. Global travel resumes, and visitors start to flock back to our shores. The tour guide and the cab driver are equally delighted to get back to form again.
Granted, the real situation will be somewhere in-between, with mixed blessings.
Only time will tell.
For investors who felt you might have missed the boat, do not fret. The hard facts are that it is NOT going to be all rosy, as if the world never encountered this coronavirus. The stock market will have to re-adjust somehow, to reconcile with the real economic picture.
Until then, bide your time and keep your powder dry and ready.
You can read the article [here].
The world is still nursing from job losses and business collapses due to the artificially imposed economic lockdowns. Yet, if you have only a window to the world through stock market lenses, you can hardly be faulted to be cheery. It looks to be all sunshine after the torrent of rain in March.
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| Image by Mammiya from Pixabay |
On Friday, the U.S. stock markets jumped, simply because the unemployment rate was much lower than expected (13.3 per cent versus the estimated 19 per cent). The disparity was so significant, it prompted news outlets to investigate why the economists had it so wrong. (You can check out one such article by The Washington Post [here].)
The truth is - as CMC Markets pointed out - amid the death and gloom caused by the coronavirus, people want to HOPE that the worst is over and good times are coming.
"Hope is an admirable human quality, but a poor basis for investment. It’s natural that human beings want a brighter future, regardless of reality. This may explain the rally. It was largely driven by hope for a cure, hope for a vaccine, and hope for a short and consequence-free lockdown. At this stage, none of these hopes is real." - CMC Markets
Even with the Floyd protests, China tightening its grip on Hong Kong, nearly 400,000 COVID-19 related deaths and the lack of a vaccine aren't enough to dent the jubilant mood on Wall Street.
Hope is indeed a miraculous drug.
Are investors prescient to cast a blind eye to the decidedly dismal Q2 results, and look forward to the second half of the year for glad tidings?
Frankly, no one has the answer.
But one thing is for sure - the chasm has to close. No bull can run forever, when there is blood on Main Street.
The negative base case is for stock markets to face the truth and drop back to recessionary levels. The economy re-opening is a boon, but the consumer behaviour is altered. People are wary about going out to crowded places. With the stringent restriction on number of customers in restaurants and stores, malls are unlikely to regain its liveliness anytime soon. While the government tries its best to create new jobs for the labour force, there is a limit to the number and the private sector is unable to pick up the slack. Work-From-Home arrangement shows employees can still be productive at home without being present in an office environment. Employers review their existing commercial rental arrangement, and decide to do with less. Shops depending on the midday office crowd for brisk business are impacted from a drop in patronage.
On the other end of the aisle is a positive base case for the economy to show resilience and a quick bounce back to pre-COVID-19 activity levels. Jobs are swiftly restored, thanks to the huge stimulus provided by governments in cohesion. The consumer is happy to go out and spurge, having been cooped up in the house for so long. News of a vaccine ready by the end of the year give people hope that we are going to survive this crisis and hence the optimism in the markets is justified. Stock markets rally to new lifetime highs. Global travel resumes, and visitors start to flock back to our shores. The tour guide and the cab driver are equally delighted to get back to form again.
Granted, the real situation will be somewhere in-between, with mixed blessings.
Only time will tell.
For investors who felt you might have missed the boat, do not fret. The hard facts are that it is NOT going to be all rosy, as if the world never encountered this coronavirus. The stock market will have to re-adjust somehow, to reconcile with the real economic picture.
Until then, bide your time and keep your powder dry and ready.
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