As the month of April closes and equity markets continue to rise, we at Harvest have fielded numerous questions on what we expect going into May and how markets will behave during the summer doldrums. Considering the size and speed of the sell-off in March, we have not been surprised by the velocity of the +12.5% rally over the past month as the bid to stocks has remained firm and the path of least resistance for volatility continues to be lower.
Our thoughts heading into the month of May is the S&P will probably remain in a trading range between 2600-3000 as we move beyond the Q1 earnings season. We predicate our beliefs on the fact that the VIX and the credit markets have basically moved in lockstep over the past month and will continue to do so. As financial conditions continue to ease, and interest rates rest at zero with the distinct possibility of going negative, investors have concluded that according to the Fed, there is no such thing as a bad debt for the time being. The colossal “Fed put” in place for now will continue to buoy all asset classes, with equities leading the way. The stock market may not be reflecting the overall health of the economy because of the liquidity being added by the federal government. Investors have accepted the fact that there will be numerous starts-and-stops in reopening the economy and therapeutics to manage the pandemic are on the horizon. Heading into June, we are confident that the market could hit new highs as “official” lockdowns in most states conclude and investor optimism about a return to normalcy could propel us thru the upper end of our trading range.
Looking a bit further into the July /August timeframe, we believe markets could become a bit unsettled as the real impact of the virus manifests itself more clearly with 2nd quarter earnings; perhaps real impairment charges to bank and corporate balance sheets start to take hold, especially in the Commercial and Residential Mortgage market (how long can end bondholders sustain without cash flows from rent and mortgage payments?). Also, will earnings guidance and the substantive capex cuts mentioned by numerous companies deteriorate to the point of jolting traders and investors alike?
The real question investors will be asking once we get thru the summer is whether the demand part of the US economic equation has comeback in any material fashion. Quite telling over the past few weeks is the price destruction in the energy (oil) space which showed us exactly what can happen when end demand for a certain product evaporates. On another note, we are keeping a keen eye on what is transpiring in education, especially university and college life, and whether students will return to campus in the Fall. The micro-economies tied to the large college towns in the US – think Boston, Ann Arbor, Madison- are a critical part of the US economy and would be of concern to us if the resumption of classes in September is delayed. Add on the upcoming presidential election season, and we could be in for a turbulent ride come the Fall.
Please feel free to contact us with any questions.
Partner, Portfolio Manager
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