The pandemic outbreak, the economic collapse and the protests around US for the killing of George Floyd could be seen as the three facts that are generating chaos and panic overseas.
Due to the lockdown of cities following by the increase in Covid infections, the market reaction was no long in coming.
As expected, the markets went down and economists start debating a V versus a U shaped for the recovery of the economy.
First of all, after the peak of February, the index S&P500 (the index of the 500 largest publicly traded companies in US) fell down in March after the Corona virus spread around States and the most penalized securities were the airlines and transports due to lockdown and the distance measures.
Even the Oracle of Omaha was wrong about airlines, announcing it in a conference of Berkshire Hathaway and selling the entire position in Delta Airlines, American Airlines, Southwest Airlines and United Airlines. Consequently, many other investors did the same as Buffet is seen as the perfect investor.
This state of play also contributed to the price below zero of the future on the WTI Oil in April with maturity in May (we talked about it here).
After the news of an unemployment of 14,7% in April and the economic collapse, as history teaches us, the FED was not twiddlling its thumbs and stepped in with an amount of 3 trillion of dollars during these months, something that it’s even difficult to put in numbers.
This intervention and a slow recovery let markets go better.
Source: Yahoo Finanza
From the fall of the 23th March, where the index was of 2232.43, there has been a rally of 50 trading days of 37.7% to the third of June, marking the greatest rally in the history of S&P500 over 50 days of trading and by this Monday, the S&P500 went back to pre-crisis levels.
The companies that outperform the index and seems to be not affected by the pandemic were those which businesses belong to tech, pharma and communications. Particularly, companies known by insiders as “FAANG”, the acronym of Facebook, Amazon, Apple, Netflix and Google (Alphabet) towed the index up with Microsoft. Also, the top six companies of the S&P500 now weight more than 20% of the index, instead of the 10-13% of they used to be in the past years. This could be explained by the fact that their businesses were not affected/but been helped by Covid restrictions as they offer entertainment, tech services, communications and e-commerce.
But all that glitter is not gold. Is Apple really making substantial innovations in its products? With the launch of Iphone SE is trying to gather market share, but maybe it is not enough with all the competitors. Netflix is facing competitors such as Disney Plus and Amazon Prime Video, and Facebook failed it attempts to get a new coin, “Libra”, while launching its e-commerce and a section of “news”.
And what about Amazon? Even Elon Musk, the visionary CEO and founder of SpaceX and Tesla, has said its on the Bezof’s company: for him, it is too big and his tweet is referring to an unpublished book on Amazon and its guidelines.
Trump thinks the same: for him, “Amazon is destroying shopping malls and centres and has a big tax advantage over someone who is paying rent and is employing a lot of people”.
In the end, what seems to be a V shape recovery in these days stock markets also thanks to the news of an unemployment rate at 13.3% (against an expected rate of 20% compared to the 14.7% of April), does not work for the real economy.
Even Powell, the FED President, yesterday, during the Press Conference warned “Indicators of spending and production plummeted in April, and the decline in real GDP in the current quarter is likely to be the most severe on record. Even after the unexpectedly positive May employment report, nearly 20 million jobs have been lost on net since February, and the unemployment rate has risen about 10 percentage points, to 13.3 percent” and then about interest rates said “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates”.
What it sure is that this is an hard time for Trump, who is facing a pandemic, economic collapse and protests for the #blacklivematters movement, enough to go to the White House Bunker last Sunday and with Biden (the democratic candidate) who leads Trump 14 points in the new polls.
It is a time of uncertainty and we must be prudent, even in the markets!