The headlines may be all about riots, but the markets are probably less concerned about this than the major media outlets.
After months of non-stop Coronavirus coverage this is something new for the media to magnify and sell advertising around.
Don’t get me wrong – the events that have transpired are truly despicable and heartbreaking – so I don’t want to be misunderstood here. The tragedy is real, but the markets aren’t particularly concerned about them… at least not yet.
By and large, these social issues, while important, are not often major market movers. Relatively speaking, the damage is worse than a lot of storms cause. The loss is certainly unnecessary, but it’s not something that is going to have the entire economy panic over… at least not yet.
And why at least not yet? Because these issues are not yet economic issues. (Sure, you could argue that they are. But they’re not ‘new’ economic issues. We’ve been struggling to wrap our arms around these issues forever. Perhaps this will lead to meaningful change. And if so, then we can evaluate if there are financial impacts. But for now, nothing has changed… at least not yet.)
If we peer through the fog of media coverage what we find is the same underlying theme: markets are still ignoring a lot of fundamental economic data in favor of optimistic data around individual positions. ABC company says it’ll profit more than it previously expected? Great, let’s drive the PE to 1,000,000… it doesn’t make sense per se, but it’s how money has been flowing into the markets.
The danger in all of this is the future reality check. At some point, these numbers will have to make sense again. And paying for a company to grow at 97,000% annualized growth (I exaggerate for journalistic bravado and to make my point here) is probably a little rich. Honestly, how many companies can sustain this kind of growth? Realistically none… yet investors, presently, seem willing to pay outlandish premiums for future incomes in stocks that are not likely to ever materialize.
So, as has been the theme discussed in our forum calls, the fundamental data seems optional right now. If it confirms sentiment, stocks can really shoot up in value. If it doesn’t confirm sentiment, all sentiment needs right now is a really good story to rationalize why the stock deserves to grow.
Of course, this same logic works in reverse. If a company doesn’t have a great story, sentiment can destroy it.
If you’re thinking this is no different than any other time in the markets, you’d be right. But one caveat: in more typical markets, fundamental data DOES actually matter. In today’s Bizarro world, since fundamental data and guidance are scarce, investors seem to be more inclined to track a good story than actual numbers.
Also, as discussed, this behavior likely doesn’t last forever. Assuming the economy re-opens (which, it has to for many reasons) rose-tinted glasses should ultimately come off and fundamental data will actually matter. Companies may tell a great story about being profitable, but the proof will have to show up, or investors will be forced to take a hard look at whether or not they’re willing to pay such (historically) outrageous premiums for future earnings that may be more fictional than originally advertised.
So, for now, the markets continue to ignore a lot of fundamentals. How long? Probably a couple more weeks. As much of the country comes back online, here are the themes:
- How fast can we re-open?
- Can we stay open?
- What industries survive?
- What industries thrive?
- What industries fail… and how quickly?
Once July rolls around – assuming the economy is basically re-opened (albeit somewhat modified and handicapped still) – then the markets will likely start to expect real earnings guidance again. This ‘we don’t know, we’ll tell you later’ stuff probably isn’t going to fly. But until then, don’t expect fundamentals to wag the dog too much. We’ve finished most of earnings season already for Q2. Now we get to hold our breath until Q3.
For this week it should be interesting. The 200-dma held for the SPX last week. And major indexes closed above the big fat round numbers of 3000 for the SPX and 25,000 for the DJIA. These are emotional lines in the sand. They are also good technical signals for the markets.
This week should be relatively sideways as markets assess whether these critical support levels can hold. For the SPX, the resistance is at 3050 / 3060… and… 3136 (yep, that much higher). Support is at 3028 / 3002 / 2886
Keep a level head out there. And try not to panic… at least not yet.
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